SMSF and Property – A Neutral Perspective
I made mention earlier in this newsletter about the growing popularity of Self-Managed Superannuation to purchase direct real estate investments.
There is good reason why it is gaining popularity – the ability to use your super account balance to make a substantial deposit on a property, the situation where with a large enough deposit any rent can cover the interest and holding costs of the property, the ability to use your employer and any other pre-tax contributed money to pay off the principal of the loan, and the fact that any income or capital gains from the property may be tax free once in pension mode it very attractive.
The strategy is by no means for everyone. There are potential drawbacks to take into account – generally residential rental property has a capital growth emphasis, and may not provide enough income to meet minimum pension payments in retirement. Property is a lumpy, illiquid asset and investors are well advised to consider the issues surrounding diversification with so much committed in one single investment. For those borrowing, there is also the double edged sword that while gearing magnifies gains, it can also magnify losses. You also cannot borrow to improve the property, so any renovations or modifications need to be funded from cash reserves.
Therefore it is incredibly important that you seek the right advice before embarking down this path. There are a number of key things to consider. There may be more that are specific to your personal circumstances. Generally, some to keep in mind are:
• What do you want your investments to achieve for you? Are you accumulating assets and focussed on capital growth, or are you instead looking for steady income streams?
• How much longer do you have before you retire?
• Will you be relying on your super to assist with paying off debts (like home loans) when you finish work?
• How much do you have in your fund, and how much can you, or your employer, contribute every year?
• Are you comfortable investing in assets that have fluctuating investment value?
If the answers to these questions suit considering this strategy, then property investment in super can lead to a very favourable outcome. It is important that the strategy and the outcome are considered first, and then the property. The best property opportunity may not best fit a SMSF strategy if your circumstances don’t suit. Conversely, the best laid super opportunity may fall apart if the property you buy is all wrong.
And this is where the clincher is. Quite often we see negative press about property spruikers peddling overpriced developers stock, driven by huge commissions. Increasingly, they are looking to peddle the property under the guise of SMSF advice. The all important question to consider is, what is the end goal of the person providing the “advice”? If it is ultimately simply another way to sell the property – that is, selling the property is the primary driver, and the advice is secondary – then stop and proceed with heightened caution. What we fear, is that when the chickens come home to roost, and investors in these surplus developers stock or greenfields house and land package ventures do not see the returns they’d hoped for (or worse still, they are worth less than they paid for them) will they blame the vehicle holding the asset (super) or the asset itself? And will the press be clever enough, or have the restraint to stay away from the tempting sensationalist story, and separate spruiker peddled bad property investments from the sound tax holding structure that super can be?
Our position is neutral. We do not sell property, ours or anyone else’s. We have no vested interest in pushing property down anyone’s throat. We do not administer Self-Managed Super Funds – the accountants receive those fees, not us. Where it is appropriate, and clients demonstrate experience or an interest in property investment, we will absolutely consider the best possible tax structures and funding vehicles for that. Buying the property is then up to you – tread carefully. That decision will make all the difference to a successful or otherwise use of superannuation to hold your investments.
If you, your friends, family or colleagues are interested in exploring your options in this area, please call us to discuss on 9323 3000.