Introduction

The National Disability Insurance Scheme (NDIS) was first introduced in Australia in 2016, and shortly thereafter in 2018, the Special Disability Accommodation (SDA) scheme was announced. The SDA scheme incentivises private landlords to build purpose-built SDA homes. This, in turn, takes the burden off the public sector to keep building hospitals and suitable institutional facilities to house people with disabilities who will never be able to live in traditional residential accommodation. This saves the government billions of dollars each year. Recent published data by the NDIS suggest that about 550,000 Australian people with disabilities are funded under the NDIS, and of this, approximately 28,000 NDIS Participants qualify for SDA. The numbers also reveal that as of 2023, only about 8,000 SDA homes are in the marketplace. This means that there is a massive undersupply of SDA homes and a huge opportunity for savvy investors who take the time to dig a little deeper into this emerging asset class.

My Background

I have been helping investors acquire SDA Property Solutions since 2022. Today, I am just as passionate about SDA as I was back then. If you aren’t familiar with my background, I founded Private Mortgages Australia Pty Ltd in 2014 (PMA) (www.privatemortgagesaustralia.com.au). I remain a significant shareholder of PMA and its sister company, Active Property Group Pty Ltd (APG) (www.activepropertygroup.com.au). I am proud of the business systems I built from scratch, which are still strong today. The team of ex-career bankers are doing a great job handling the day-to-day operations now that I have exited.

When I completed my tenure on the board of PMA/APG in 2022, SDA seemed the logical next step for my career. I first started tracking SDA in 2019 when my wife and I were looking to diversify some investments outside our lending business. As a self-confessed finance nerd, I couldn’t surpass the high-yielding residential investment properties. And yes, achieving double-digit gross yields with SDA property is possible, which I will demonstrate below. Much like the world of private lending investors need to work with a competent manager who knows how to maneuver within the asset class for maximum results and to mitigate risks. I have learned over the years that many perceived risks aren’t that scary once you better understand them. 

Woeful Beginnings of SDA

It is unfortunate that in 2018, when the SDA scheme first rolled out, builder-led designs for High Physical Support (HPS) homes flooded the market, creating a glut of unsuitable accommodation for NDIS Participants. This is because the funding for HPS Participants was higher than the other SDA Tiers. The net result was many unhappy investors with vacant properties for several years. It is well known in the industry that property spruikers offering rental guarantees had to cancel their guarantees to remain solvent. Some SDA Providers (think rental managers under the NDIS) went out of business, and consolidation ensued. The cream began rising to the top, and the shonky operators exited stage left.  

The oversupply of HPS homes was recently resolved in July 2023 when the NDIS announced the first 5-year pricing review. The NDIS changed the funding for the two lower Tiers (Improved Livability and Fully Accessible), bringing them closer to the two higher Tiers: HPS and Robust. This meant that those landlords holding out for high-paying HPS Participants could get their homes filled and get closer to the yields that they were promised by those early-day fly-by-night property spruikers. Many investors are still left with a bitter taste from the experience of having a vacant property for several months or years.

Fallacies Of SDA

There are many fallacies in the NDIS space that prospective investors need to consider. It is damn near impossible to fill and 4-bedroom NDIS home with 3 NDIS Participants. Getting the first NDIS Participant is easy, the second is harder, and the third is nearly impossible. Be wary of any group selling pie-in-the-sky numbers based on 3 NDIS Participants co-tenanting. It is the exception, not the rule.

The next fallacy is that Robust Participants can co-tenant. This is not the case at all due to their more complex behaviour disorders. Although it has been done, this is another exception to the rule. Prospective investors must understand the Tier that they are building to. Clever-designed homes will cater to multiple Participant tiers, for example, Robust and Improved Livability. The result will be a great breadth and depth of Participant choice.

So, how does one replace their income with SDA property?

Let's look at some numbers to illustrate the point. In 2023 the average Australian salary was $98,000. So, let's use this as our target number to replace.

Let's say that Mr. and Mrs. Jones are my clients. They are 50 and 49, respectively, and they both earn the same salary of $98,000 each. Their home is worth $1,200,000, and they owe the bank a $150,000 mortgage (yukky personal debt with no tax deductions). They have no other debts, no investment properties, nor other investments like shares or cryptocurrency. They have two kids, aged 16 and 17, which means they are practically adults and not considered dependent from a bank's perspective. This is a very typical situation where my client's biggest asset is their home, and they have a mortgage on it. They are freaking out about a government pension-funded retirement thundering down the road towards them. They know the next decision they make is crucial, and if they do nothing, they are screwed.

I would arrange a Borrowing Capacity Letter (BCL) from my preferred licensed broker. They would get a $350,000 equity release from their home as the cash injection needed for the SDA purchase of $941,000. A specialist lender would provide a first mortgage on the Dual Key SDA home. The lending on the SDA home will be under a 65% Loan to Value Ratio (LVR), meaning it will be a piece of cake to get the funding given their incomes and overall debt load. The Dual Key SDA homes will deliver a $146,936 gross yield once fully constructed and tenanted. Here are the numbers set out in a Property Investment Analysis (PIA) below –

According to the numbers above, the property will have positive cash flow once fully constructed and tenanted. Working with a competent manager will ensure participant sourcing commences during the construction period.

I know what you are thinking, I haven't replaced their income with $98,000 yet, because the net yield from year one is only $969 positive weekly cash flow. Remember, they owe $150,000 to the bank for personal home mortgage. By directing the positive cash flow of about $50,000 annually, they will have paid off all their personal mortgage within three years. They will be 53 and 52, respectively, and could go again for a second SDA Property Solution because they could still get bank financing. They could refinance against the equity uplift in their SDA investment property or their home. Once they turn 55, banks impose more onerous conditions, making it much harder to get credit. Assuming they acquire another SDA Property Solution that delivers about $1,000 positive cash flow per week, they will have achieved their $98,000 positive income from investments before age 55. They could aggressively pay down the investment mortgage of $350,000 secured by their home over the next ten years in time for retirement.

Conclusion

The numbers speak for themselves. If Mr. and Mrs. Jones decide to take the plunge and acquire an SDA Property Solution they will be achieving strong positive cashflow that will replace an standard income within a few short years. The value of the equity in their property will grow over the next five years and they will be sitting on a decent amount of equity of about $580,000. This gives them lots of options to continue to grow their portfolio. If they do nothing they will reach retirement, scratching their heads wondering why they have not got more to show for a lifetime of working hard.

If you want to build a property portfolio that will supplement your income and perform in any market conditions, consider engaging our team for a One-To-One Property Strategy Consultation. Use the below link to book a free, no-obligation Property Strategy Consultation: