More Australians are buying property with super, here’s why
Leading up to 2015 budget announcements in May 2015 there was a lot of media attention on the possible decision by the government to remove the ability for SMSFs to borrow to acquire property. This was off the back of the Murray Financial System Inquiry that was released on the 7th December 2014 recommending removing the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements (LRBAs) by superannuation funds.
The dust has now settled on this topic and the government has decided to leave superannuation alone on this matter for the time being. Due to this there are still opportunities for SMSFs to purchase property with a borrowing in place so as to allow a SMSF to buy an asset that it doesn’t currently have sufficient cash to purchase outright.
Why would you consider property over other asset classes?
From speaking with our client base over time I have had the following key reasons given by clients.
- Clients have had a bad experience in the share market in the past and just can’t bring themselves to invest in the share market again (they want bricks and mortar investments).
- Clients have built a strong property portfolio over time and they believe they know the market well enough to make sound investment decisions on new properties that can be bought by their SMSF. These investments are expected by these clients to achieve strong capital growth and/or deliver a good rental yield. When it comes to shares and investing in this asset class they feel it is to foreign to them and they don’t want to invest in this space on this basis.
- Clients believe the volatility of the property market is more manageable than that of shares and managed investments; as such they only wish to invest in property.
- Clients that are in business and need business premises to run their business from believe they are better of owning the required property and paying themselves rent instead of paying rent to someone else to benefit from.
The stated reasons above are not necessarily all a sound basis to not invest in other markets such as shares or managed funds but nevertheless this is sometimes the reality of the basis for investment decisions of clients. It is noted I have observed in our client base some very good returns made by clients on their commercial and residential property investments. I have also seen client’s lose on property investments they have held in their SMSFs.
Note that one of the many items which must be considered before investing in a large illiquid asset such as property is your current and future SMSF cash flow needs. If a SMSF will not have sufficient cash to pay pensions or pay for annual operating costs and property expenses (including possible loan repayments) then this type of investment would not be prudent.
Other factors to consider is diversification risk which results from possibly holding the majority of your wealth in one significant asset. If this investment decreases in value in a property downturn or is un-tenanted for a significant period of time then clients may have been better off with a more diversified portfolio or holding cash. Diversification can possibly be better achieved by holding various asset classes in Australian and international shares, managed funds which target their investments into various regions in the world, holding fixed interest and cash to manage the risk of one market retracting due to adverse market conditions.
There are times when the diversification risk is managed in a holistic sense even though a SMSF may be all in property. An example of this is where clients hold property investments in their SMSF and due to contribution restrictions they still hold share portfolios and managed funds outside of their SMSF.
The above is brief overview of why property is purchased in a SMSF and there are many factors that should be managed and considered to not breach the superannuation legislation. I stress the importance of obtaining advice before entering into any transactions and note this article is not intended to be advice that should be solely relied upon as no consideration is given to individual circumstances of readers.
If you wish to discuss these or other strategies you could be utilising, contact Super on 1300 255 457 and one of the team will contact you to arrange a meeting to explore this or other strategies further.