By David Henriksen
02 September 2019
Investing in property is a very popular option in Australia. 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. In other cases, the SMSF has sufficient funds to buy a property as well.
Why some people decide to invest in property
Some of the key factors that have influenced our clients to invest in property over other investment options include:
- Having a bad experience with the share market, many now 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.
- 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 why business owners and individuals choose property in some cases. 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 a sound investment strategy. We have also seen several examples of people losing money on commercial and residential properties.
Considerations and warnings
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.
The initial upfront costs with large property are also high when you consider legal costs, stamp duty, possible lending costs and ongoing interest costs if borrowing to buy a property. Comparing this to a portfolio of shares, even if under advice, the share portfolio usually has a lower entry cost. If things don’t go well it is much easier to sell some or all of the shares compared to an underperforming property which due to the underperformance may be hard to sell.
Another factor to consider is lack of diversification, risk driven by holding the majority of your wealth in one significant asset. If the property value decreases due to a downturn which we have seen occur in the last 12 months in many cities in Australia 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 have more questions after reading this article or have an SMSF and want to talk further please contact PKF Sydney & Newcastle on (02) 4962 2688 or email [email protected] and one of the team will contact you to assist and further.