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Brendan Coates

Brendan Coates

Superannuation: Is investing in property through a SMSF for you?

The best-laid property plans are more often than not long-term ones.

It’s a consideration for many of us in these uncertain economic times as we weigh up our financial futures.

Widespread moves to access superannuation early due to the coronavirus crisis speaks volumes about how hard people have been hit financially by this unprecedented health crisis.

However, this could also be a good time to consider investing your super in property for the potential long-term gains.

Purchasing property through a Self Managed Super Fund is a different proposition to buying your own home or an investment. But given the volatility of the stock market, record low interest rates and the tax concessions available it is worth considering.

Diversifying your super by investing in property can be a good move if done correctly.

“I always say to the client, the thought process has to be tailored to the personal circumstances of the fund,” said Julie Dolan, Director, head of SMSF and estate planning at KPMG Enterprise.

“They need to consider their risk tolerance and their understanding of what they are doing. That is all part of a well-thought-out investment strategy.”

So, why should you consider investing your super in property and what can you do if you believe it is the right move for you?

Taking control of your super

Creating an SMSF and investing in property can give you greater control over your retirement nest egg. 

“One of the dominant reasons people like to have an SMSF is the control and when it comes to investing in property they like the control they have within the portfolio,” Ms Dolan said.

“People do it, in the sense of commercial property, like leasing to a related entity that is running a business.

The best results come from buying in areas that have historically strong capital growth.

“Long term it is something they can touch and feel, they can do renovations to improve it.

“It is a very common asset. At the retirement stage they rely on it to provide an income stream. However one issue is liquidity. It is harder to get money into it. Funds need that liquidity buffer so they are less chance of a default.”

You need 200k to invest

You should have at least $200,000 in super before you begin investing in property. If you are borrowing, the loan-to-value ratio is much higher for an SMSF than for residential property, so you need a deposit of around 25 to 30 per cent.

Lenders see it more as a risk,” buyers agent Leon Jacques from Cohen Handler explains.

“They want to protect you from losing your super and want to make sure you buy the right property.”

The Bank Of Queensland is a leading lender to SMSFs.

The interest rate stress test on SMSFs is also more onerous than on residential property, because, as is the case with the LVR, it is considered a commercial investment.

SMSF Lenders, 

such as BOQ

, may also require your savings to be five per cent of the value of the property.

The right property

In order to protect your superannuation and the money you will have available to you in retirement, it is vital you invest in the right property that will provide the capital growth you are after.

“Personally I think it is a great way to invest your super,” Mr Jacques said.

“There is risk but the reward is there as well. The risk is the leverage. But if you buy in a good growth area, you will get that growth on your money, on your deposit but not on the money you have borrowed. That is the reward.

“If you risk buying in a bad area, that is more volatile, you could lose your money quickly.

“You have to buy in a blue chip area with historically good, consistently strong capital growth.”Julie Dolan, KPMG Australia

KPMG’s Julie Dolan says investors need to consider their risk tolerance Picture: Supplied

As an example, if you have $300,000 to invest and borrow $700,000, if the capital growth follows historic metrics for a good buying area and doubles in value in 15 years, your money will have grown by $1 million.

Be careful buying off the plan

Buying development property off the plan may prove to be a risk too great for many SMSF investors.

“Be careful buying off the plan,” warns Rob Joseph, a financial adviser and SMSF specialist with My SMSF Property.

“You can get stung on the valuation of the property and that includes with the lender. Banks can quote conservatively on property value and that could create big problems. It’s important to do your numbers to understand what a property is really worth and also to undertake a cash flow analysis into your fund.

“Due to the oversupply of apartments in some areas, it is safer to purchase in central, CBD areas.”

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Lloyd Collins, state manager at ASX-listed developer Cedar Woods, said apartments could be a good buy for SMSF investors, as long as they do their homework.

“People must look at supply versus demand in the area,” he said.

“A good location with low supply means less competition and should provide strong rental returns.

“It’s also important to compare location in terms of amenity. Areas with strong town centres, like Williams Landing [25km southest of Melbourne’s CBD] has amenity and people often choose that over cheaper locations.”

“Apartments like these hit the price point for SMSF purchasers.”