This is the second of a three-part series on investing in DHA homes. You can read the first article here. The content is produced by Fairfax in commercial partnership with DHA Housing. The advice contained in this article is for general information only and prospective investors should seek independent advice. Some terms and conditions apply.
Investment homes leased back to Defence Housing Australia for housing military personnel become a key part of many Australians' investment portfolios, and at first glance there is little not to like.
![Despite the criticism, DHA has many happy investors.](/web/20170408191810im_/http://www.theage.com.au/content/dam/images/g/u/y/b/8/q/image.related.articleLeadwide.620x349.gvfzzc.png/1491558312733.jpg)
With a nine-to-12-year lease, zero vacancy rate and maintenance team that covers any hiccups that arise, renting out a home doesn't get any smoother than this.
But a question for investors is whether DHA's management fee is worth it. At 16.5 per cent of the property's rent, or 13 per cent in most cases where there is a body corporate covering some aspects of maintenance, it is double the cost of many property managers.
Answering this question isn't a simple exercise. While some property managers take less than 7 per cent of the rent as a fee, they each have a list of additional fees for things such as letting, advertising and preparing a lease.
Landlords also need to fork out time and money on property maintenance, and regularly forfeit a few weeks of rent between tenancies. Quantifying the cost of all this is an involved exercise and varies enormously among properties.
One critic of DHA housing is Paul Nugent at Melbourne-based Wakelin Property Advisory. He believes it is a better deal to invest in a well-maintained regular home than to go with DHA and pay the higher management fee.
"If there is no need for maintenance in any year, you are paying an extra 8 per cent for nothing," Nugent says on a video posted on Wakelin's YouTube feed. On a $500,000 property, the 8 per cent represents during the first few years of ownership and DHA restores the property at the end of the lease.
Running the numbers
But despite the criticism, DHA has many happy investors. It manages more than 13,000 properties on behalf of lessors and conducts an annual survey to see how satisfied they are. Its latest survey had 1389 respondents, and more than nine out of 10 said they were satisfied with overall customer service. When asked if they would recommend investing with DHA to others within the next 12 months, nearly four out of five said they would.
Consultancy BIS Shrapnel, in an independent report called Defence Housing Australia Service Fee Comparison, attempted to put a figure on the real cost of owning a house in an effort to determine whether the yearly expense of holding a DHA property was more or less than regular houses.
BIS Shrapnel found that even in the highest-rent and lowest-cost scenario they could simulate, when all costs were tallied up the regular investment equated to 18.1 per cent of gross rent compared with DHA's 16.5 per cent.
The real cost of owning a home
BIS Shrapnel surveyed property managers in the same areas as DHA properties and found management fees were between 6.6 per cent and 11 per cent. BIS added additional fees for things like advertising, reletting and preparation of a lease.
BIS also looked at things like property maintenance, vacancies between tenancies and landlord insurance. And it attempted to price the time landlords spend responding to and dealing with maintenance call-outs, assigning $38.80 an hour based on average weekly ordinary earnings of a full-time working adult in Australia.
While acknowledging "considerable variation in costs" among properties, BIS provided three scenarios – low, medium, and high cost.
The medium-cost scenario, which was considered most likely, was $7365 per annum for a property earning $450 a week in rent. This was equivalent to 31.4 per cent of gross income – far more than DHA's management fee.
"Under all of these rent ranges the DHA fee of 16.5 per cent of gross income is notably lower, producing considerable cost savings per annum," the report says.
BIS also found the management fees of DHA properties compared favourably with other investment types such as retail master trusts and personal superannuation funds.
Weigh it up
If you want a hands-on investment you are unlikely to see value in a DHA home. Some landlords are quite happy to manage a property themselves without the help of a real estate agent, and even prefer to avoid paying tradespeople and do some of the maintenance themselves.
Other property owners would disagree with BIS Shrapnel's decision to put a price on the time they spend chasing up maintenance call-outs. A good property manager will do most of the legwork and the time spent answering a few emails or phone calls for many isn't a big deal.
And for landlords with the capacity to buy properties in desirable inner-city locations, the prospect of long vacancies between tenancies or falling rents is already very slim.
However, the real cost of owning a home is hard to predict and many investors have chosen DHA properties because their outgoings can be reliably budgeted for the long term with little risk of nasty surprises.
Says DHA managing director Jan Mason: "Reports of high management fees on DHA properties often fail to explore the detail of what the fees cover and the benefits to investors who are not interested in the daily hassles that come with being a landlord. DHA's Property Care service fee is all inclusive."
In the final article we will look at what happens when the lease is up and DHA hands you back your keys. Are DHA houses in desirable locations that show solid capital growth?