Why hold direct property in a SMSF?
Investing in property is a very popular option in Australia. There are a range of investment structures that can hold real estate so it is important to consider your available options to maximise your position.
In some cases, a self managed superannuation fund (SMSF) can borrow funds in order to purchase assets it doesn’t currently have the cash to purchase outright.
This strategy will likely increase in popularity as Governments look to legislate a reduction in the amounts individuals are able to contribute to their superannuation funds over their lifetime. Restrictions like this will adversely affect the population’s ability to build wealth in their super funds for retirement. This also makes it more important to consider other options for building sufficient wealth to support your desired lifestyle in retirement.
How does property stack up against other asset classes?
Below we highlight some of the key factors that have influenced our clients to invest in property over other investment options like shares:
- After a bad experience with the share market in the past, some have highlighted that they can’t bring themselves to invest in the share market again. They prefer “bricks and mortar” investments.
- Some have built a strong property portfolio over time and believe they know this market well enough to make sound investment decisions on new properties. They expect these investments to achieve strong capital growth and/or deliver good rental yield. Many feel that investing in shares is a foreign concept and prefer to stick to what they know.
- To some, the volatility of the property market is more manageable than that of shares and managed investments.
- Many business owners prefer to own their own premises and pay rent back to their SMSF rather than to a landlord.
While the examples above might not necessarily be based on sound investment strategies, it is nonetheless the reality of what business owners and individuals are faced with. We have certainly observed some great returns on commercial and residential property investments; but property can’t be touted as the be-all and end-all of investment strategy. We have also see several examples of people losing money on commercial and residential properties.
Before investing in a large illiquid asset like real estate it is critical to consider your current and future SMSF cash flow needs. If an SMSF doesn’t, or won’t in the future, have sufficient cash to pay pensions or pay annual operating costs and property expenses including loan repayments then this type of investment would not be prudent.
Another factor to consider is diversification risk driven by holding the majority of your wealth in one significant asset. If the property value decreases due to a downturn or is vacant for a significant period of time, then a more diverse portfolio or even cash could have been performing better.
This is just a brief overview and there are many factors that should be managed and considered to ensure no superannuation legislation is breached. It cannot be stressed enough the importance of obtaining advice before entering into any transactions. This article is not intended to be advice that should be solely relied upon as it in no way considers your individual circumstances.
If you wish to discuss your own SMSF strategies, contact the specialist PKF Superannuation team in Newcastle on (02) 4962 2688 or in Sydney on (02) 8346 6000.