How to Analyse Risk when Investing in an SDA Property

When the word “risk” is mentioned in relation to an SDA property investment, many individuals immediately envision worst-case scenarios, imagining a cascade of disastrous outcomes leading to potential loss.

However, it’s essential to establish a clear understanding of what risk truly entails, especially in the realm of investment. In this context, risk can be defined as the degree of variation from the anticipated or expected return. This variation encompasses both downside and upside potentials, signifying that while there exists the possibility of experiencing losses or outcomes below expectations, there’s also the prospect of achieving returns that surpass initial projections. Recognising this dual nature of risk is fundamental in navigating the intricacies of investment, particularly in specialised sectors such as disability accommodation.

When analysing the risks associated with residential property investment, it’s crucial to acknowledge that the probability of a property’s value plummeting to zero is almost negligible, particularly in Australia’s cities and regional hubs. Instead, the primary risks revolve around fluctuations in rental returns, vacancies, and interest rates. You might anticipate a steady rental return of 4-5% coupled with a capital growth rate of 4-5%, only to face the stark reality of a financial system meltdown causing a crash in capital values, potentially plunging you into negative equity. Conversely, you could witness significant spikes in rent returns and capital growth, akin to the trends observed over the past few years in Australia. Both scenarios represent inherent risks.

When evaluating the suitability of an investment, my approach typically involves weighing the downside risk against the expected return and the potential best-case scenario.

For an SDA property, the downside in a worst-case scenario might entail reverting the property to the residential pool. Considering the median rent in Australia stands at $600 (as of 2024), this would translate to an approximate annual rental return of $30,000. In most SDA scenarios, this outcome would render the property negatively geared, albeit with a tax offset. The extent of this effect would depend on factors such as leverage employed and prevailing interest rates. However, it’s essential to factor in the potential for capital appreciation, which averages around 5% in Australia. In the grand scheme of things, this scenario hardly constitutes a catastrophic event.

Conversely, the upside for SDA properties is substantial, potentially resulting in a fully tenanted property generating between $170,000 to $200,000 in gross rental income. Such properties often receive valuations based on this income, leading to significant equity increases. This potential for substantial returns underscores the attractiveness of SDA investments despite the inherent risks.

In comparing investment opportunities, it’s essential to consider the potential returns and risks involved. A traditional rental property in Australia typically offers a gross rental yield ranging from 3% to 6%. In contrast, an SDA property with one participant could yield approximately 8%, with the upper end nearing 20%. While it’s true that investing in SDA involves substantial initial costs for building modifications, these expenses can be offset through depreciation. When considering the potential for capital appreciation, driven primarily by land value, both options may yield similar increases in value within the same estate.

I often tell my friends that investing in SDA is worth serious consideration. Frankly, I believe it’s a no-brainer. Why wouldn’t you pursue the opportunity for greater returns, especially when the downside risk is comparable to that of a negatively geared residential investment in one of the major cities? The potential for higher rental yields, coupled with the societal benefits of providing specialised accommodation for people with disabilities, makes SDA investments an attractive proposition.

Thanks for reading, Dave G Stewart

P.S. to learn more, watch my Youtube video about Price Investment Analysis of an SDA NDIS Investment Property or contact me here.