At a glance, investing in defence housing with its promise of guaranteed rent and long-term leases can seem to be a safe and secure investment strategy. But before you sink your funds into this potential investment venture, you need to consider more than that.
To better understand what defence housing entails, we break down how it works, its features, as well as the pros and cons.
Investing in defence housing
Initiated by the government, Defence Housing Australia (DHA) aims to provide accommodation to the members of the Australian Defence Forces and their families. These accommodations are funded by its property investment program, allowing investors to purchase individual properties and lease them back to the government.
There are three ways you can invest with DHA—purchasing a DHA investment property, leasing your property, or buying a mid-lease property.
- Purchasing a DHA investment property. You can buy a property from DHA and lease it back to them. The process involves the following steps:
- Registering with DHA
- Getting a pre-approval from a lender
- Viewing properties for sale
- Choosing a property you would like to purchase
- Property being placed on hold
- Finalising the purchase
- Leasing your investment property to DHA. This involves leasing your property to the DHA for the long term. The standard lease terms are three or six years for shorter terms and nine to 12 years for longer ones. The lease could vary by:
- Reducing the term by up to 12 months
- Extend the term for a period up to 12 months
- Extend the term by a period of up to three years, as specified in the lease agreement
DHA Property Care is also included when you lease your property. This feature includes tenancy management, market rent review, and repair and maintenance.
- Buying a mid-lease property. A mid-lease sale from DHA is similar to a standard property transaction with a real estate agent. The process includes:
- Viewing properties up for sale
- Liaising with the real estate agent
- Finalising the purchase
- Logging in to the DHA Online Service to update information
Also read: Reducing risks in social impact investments
The pros and cons
Before going ahead and investing in a DHA property, you have to take careful consideration of its pros and cons.
Some of the benefits of investing in defence housing are:
- It may be a worry-free investment. This could be what attracts investors the most. A DHA property can be considered as a passive investment, with investors buying into a long-term product that only needs little management responsibility.
- Minimised vacancy risk. DHA will cover your rent even if it is not occupied. You may earn a guaranteed rental income for up to 12 years.
- Long-term lease. You could adopt a buy-and-hold tactic with a long-term lease. DHA’s standard lease terms are nine or 12 years. Shorter lease terms are three or six years. At the end of the agreement, the property is returned to you to lease on the open rental market.
- Property Care. As mentioned, DHA provides property management via its Property Care service for a fee. They would management the tenants, make inspections, and report periodically. They may also do market reviews, repairs and maintenance, and lease-end make-good. This means your role in managing your investment property could be minimised.
Some risks involving property investment with DHA are:
- Limited property locations. You are limited in terms of where you can buy a property. DHA properties are near Defence bases across the country. If you prefer a property in a particular area, there may be no guarantee that a DHA property is available in that location.
- Higher management fee. Hiring a DHA property manager sets you back a flat fee of 16.5% for free standing houses and a flat fee of 13% for properties where body corporate is responsible for some items that Property Care otherwise covers. These rates are higher than the average 8% residential management fee.
- Leaseback clauses. Purchasing a DHA property means you agree to lease it back to them for their members. So if you’re looking to sell your investment property any time after purchasing it, before the lease term expires, then you need to sell it to another investor. While you are allowed to sell a DHA property mid-lease, your prospective buyers are limited as the property must be sold with the lease intact. This limits your resale market.
If you are an investor who wants a long-term, low-risk, passive investment, a DHA property may be for you. However, if you prefer a more flexible investment and wish to pay lower management fees, and would like to have the freedom to choose any location to invest, this may not work for you.
As with any investment endeavour, it is best to consider your options and do your due diligence before coming up with a decision. Seeking the help of a professional property advisor could also help you make a decision that suits your strategy and long-term goals