Disclaimer: Please note Entourage Finance is not an authorised Financial Planner or Accountant. This article in no way constitutes advice and we recommend you seek professional guidance via a qualified and registered professional before investing via an SMSF.
For many Aussies, the lure of setting up a SMSF (Self-Managed Super Fund) is very attractive. You get to control where your money is invested and potentially save thousands in fees and charges that retail funds charge. In Australia SMSF’s are able to invest in lots of different asset types. This includes shares, bonds, cash products and many different property types like residential, commercial and industrial.
Lots of people chat with a friend and think it’ll be easy to set up and manage their SMSF, however the reality is it’s a lot more complex and involved than one might think. There are constantly changing rules and it’s easy to make mistakes that have far reaching consequences.
After the Murray Review there were some recommendations to remove the ability for SMSF’s to borrow money in order to buy property (known as leverage). The recommendations were not implemented. However it hasn’t stopped a number of lenders from withdrawing their SMSF lending offering from the market. But let’s back track a little bit.
Why buy property through an SMSF?
Property is a great investment for many Australians and an excellent way to grow wealth over the long term. With the right strategy in place. Investing in property through an SMSF can be quite tax effective for the individual or family. This is thanks to the low tax threshold in the super environment and the CGT discount applicable for SMSF’s.
It’s also a good way to diversify a portfolio – holding shares, cash and property ensures a diversified portfolio for the SMSF.
Julia Bull, Director and Financial Planner at BKM Financial, loves the idea of using property within an SMSF to build your retirement nest-egg in a tax-effective vehicle. Over the years she has seen great success stories across the direct property market. However, she has also seen a 35 year old forced into making additional contributions into their fund to meet the loan repayments. Instead of being able to put this money towards their home loan or lifestyle expenses. Julia says it’s a must to get advice to see if it’s the right strategy for your situation.
Julia also recommends you be wary of off-the plan investments, and to remember personal use of property is a massive no-no.
What could go wrong?
The issue at hand is not so much that of buying property through an SMSF, but when the SMSF has to borrow money in order to buy said property. The Australian regulators believe this is a highly risky investment strategy. It could mean a significant loss to the fund if the investment goes bad. Essentially, the risk is that the value of the property might drop, meaning the SMSF owes the bank substantial money.
The other big risk is in only investing in a single asset class. That is, you just invested a huge chunk of your funds in a single property. The impact of a loss on that asset is going to be far greater than the impact on a loss of an asset that forms a small part of a larger portfolio.
Of course, there’s always inherent risk in any investment you make – you need a plan in place to mitigate these risks.
What does the future hold?
In all property lending right now, we are seeing a tightening in how much and to whom the lenders are prepared to make. SMSF lending is made all the more complicated by the various ownership structures in place. This, along with the quite strict requirements lenders and regulators put in place.
We believe it will still continue to be an option for SMSF’s to borrow for property purchases into the immediate future. Be mindful that lending criteria is as tough as ever and you need solid advice from your financial planner and accountant before making a move.
A final word on SMSF Lending
We would strongly recommend having a chat to a Financial Planner and Accountant ensuring that they are authorised specifically to give advice on SMSF’s, prior to thinking about setting one up especially around the structure, ongoing costs and the investment strategy. You might underestimate what is involved and we want you to be completely educated on it prior to going through the process.
Julia says to remember, “Superannuation is a very complex structure with significant responsibilities that can have significant financial penalties if you don’t get it right.”