This article was written by Raymond Pecotic and first published in The West Australian, Your Money, on 13 September 2021.
It seems everywhere you turn, the media is telling us that the property market is red hot so it is inevitable that interest in investing in real estate will, and has, increased.
This also leads to greater interest in setting up self-managed super funds to invest in property. There are often good reasons to do that.
Investors can use their super balances to make a substantial deposit on a property where — if the deposit is big enough — rent could cover the interest and holding costs.
The idea of using employer and other pre-tax contributions to repay the loan, as well as the possibility of not paying taxes on capital gains or income related to the property once in pension mode, is attractive to these investors.
However, there can be substantial negatives to this approach if it is not used correctly.
Like all borrowing strategies, the gearing double edged sword means that while it magnifies gains, it can also magnify losses.
The tax office is also increasingly wary of single asset SMSFs, so it is important to consider how you will allow for liquidity and diversification in your fund.
In the same way investors protect themselves from fluctuations in the share market by diversifying across different asset classes, having all your eggs in the one property basket can be a problem if there is a sudden downturn in that market.
And, generally, residential rental property has been a driver of capital growth over yield so your investment may not be able to support the legislated minimum pension payments in retirement.
It is vital you seek objective, professional advice before heading down this path.
While your individual circumstances will dictate your focus, there are a number of considerations to keep in mind.
How many years away is retirement? Why are you investing? What are your goals? Do you plan to accumulate assets and grow your capital, or do you wish to have steady income?
When you finish working, will your super help you pay off debts, such as home loans? What is your fund balance, and what is the maximum contribution you or your employer can make?
Is investing in assets whose values fluctuate something you are comfortable with?
To make the right choice, it’s crucial to look at the strategy and the outcome first, then the property.
Unless your circumstances are ideal, the best property opportunity may not be best suited to a SMSF strategy.
In contrast, if you pick the wrong property for your super opportunity, it may end up being a massive flop.
This is the deciding factor. We often hear negative news about unlicensed and unregulated real estate spruikers who push overpriced property to earn huge commissions. Often, particularly in a buoyant environment like this, they market the property under the guise of SMSF advice.
A crucial question to ask is: what is the end goal of the person providing the “advice”? Stop and consider with heightened caution if the primary driver is to sell the property and the advice is secondary.
When all the hype is gone, and investors in these property ventures don’t see the returns they expected — or worse, the assets are worth less than they paid for them — will they fault the vehicle holding the assets (super), the strategy implemented, or the asset itself ?
Our position is neutral, but we certainly do not discourage it when the property and the strategy are right for the client.
But tread carefully — it is this decision that determines whether using your super to hold your investments was a worthwhile venture.
Raymond Pecotic is managing director of Empire Financial Group