At a glance, investing in defense housing with its promise of guaranteed rent and long-term leases may seem like a safe and secure investment strategy. But before dedicating your funds to this potential investment business, you need to consider more than that.
To better understand what defense housing involves, we detail how it works, its characteristics, as well as the advantages and disadvantages.
Investing in defense housing
Defense Housing Australia (DHA), initiated by the government, aims to provide housing for members of the Australian Defense Forces and their families. These homes are funded by its real estate investment program, allowing investors to buy individual properties and rent them to the government.
There are three ways to invest with DHA: buying a DHA investment property, renting your property, or buying a property halfway through -location.
Purchase of a DHA investment property. You can buy a property from DHA and rent it to them. The process includes the following steps:
Registration with the DHA
Get pre-approval from a lender
Display of properties for sale
Choose a property you want to buy
Property on hold
Completion of purchase
Rental of your investment property at DHA. This involves renting your property to DHA for the long term. The standard rental periods are three or six years for the shorter periods and nine to 12 years for the longer ones. The lease may vary depending on:
Reduction in duration up to 12 months
Extend the term for up to 12 months
Extend the duration of up to three years, as specified in the rental agreement
DHA Property Care is also included when you rent your property. This functionality includes rental management, market rent review and repair and maintenance.
Purchase of a mid-lease property. A mid-term sale of DHA is similar to a standard real estate transaction with a real estate agent. The process includes:
Display of properties for sale
Liaise with the real estate agent
Finalize the purchase
Connect to the DHA online service to update information
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The advantages and disadvantages
Before going ahead and investing in a DHA property, you need to carefully consider its pros and cons.
Some of the advantages of investing in defense housing are:
This can be a worry-free investment. It could be what attracts the most investors. A DHA property can be thought of as a passive investment, with investors buying a long-term product that needs little management responsibility.
Minimized risk of vacancy. DHA will cover your rent even if it is not occupied. You can earn guaranteed rental income up to 12 years.
Long-term lease. You could adopt a buy and hold tactic with a long-term lease. DHA's standard rental terms are nine or 12 years. The shorter rental periods are three or six years. At the end of the agreement, the property is returned to you for rental on the free rental market.
Property Care. As mentioned, DHA provides property management through its Property Care service for a fee. They would manage tenants, conduct inspections and report periodically. They can also do market research, repairs and maintenance and end of lease repairs. This means that your role in the management of your investment property could be minimized.
Some risks related to real estate investment with DHA are:
Limited property locations. You are limited as to where you can buy property. DHA properties are located near defense bases across the country. If you prefer a property in a particular area, there is no guarantee that a DHA property is available there.
Higher management fees. Hiring a DHA property manager makes you pay a flat rate of 16.5% for individual houses and a flat rate of 13% for properties where the legal person is responsible for certain items that Property Care covers otherwise. These rates are higher than the average residential management fee of 8%.
Sale-leaseback clauses. The purchase of a DHA property means that you agree to rent it to them for their members. So if you are looking to sell your investment property at any time after you purchase it, before the lease expires, you must sell it to another investor. While you are allowed to sell a DHA property mid-lease, your potential buyers are limited as the property must be sold with the lease intact. This limits your resale market.
If you are an investor looking for a low-risk, long-term passive investment, a DHA property may be for you. However, if you prefer a more flexible investment and want to pay lower management fees, and want the freedom to choose anywhere to invest, this may not work for you.
As with any investment effort, it is best to consider your options and exercise due diligence before making a decision. Seeking help from a professional real estate advisor could also help you make a decision that fits your strategy and long-term goals
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