The real danger with SMSF property

Hi Don – to answer your question – yes they should. Not sure SMSf borrowing is accepted across all lenders as ANZ and NAB have exited the market and St George is continuing to tighten the lending criteria – as recent as yesterday St George introduced a 10% minimum liquidity requirement.

SMSFs (I am passionate about) are a great opportunity for people to secure their retirement by investing in direct real estate, many people are priced out of the resi market by investing personally and now have accumilated a significant amount of super – say $100k with a young couple, and would like to purchase property. The problem is that the spruikers out there are running seminars and getting these people to buy a property without understanding the risks involved, only the rosy picture of what a super investment it is. These people are easy to find but hard to prosecute. Unfortunately, they are operating now and people are buying poor/ overpriced property. That is the danger right there, being encouraged to buy property – and they are negative cash flow.

Well the other side of the story – which I have assisted hundreds of Australians with – is educating clients on the risks and benefits (in that order) of an SMSF, your responsibilities as a trustee, your borrowing power, the structure required to borrow and celebrating the choice of the right property. Pretty much all the clients on our books are neutral or positive and have properties that are taking advantage of the wonderful concessional tax rates for SMSFs and will benefit in retirement – with a diversified portfolio of properties and shares that fingers crossed achieve positive capital growth and zero tax on sale in pension phase.

Of course the story is not always rosy. I have assisted many that are victims of spruikers who are providing unlicensed advice on SMSF, their stories are tragic, but no different to people who have been conned outside super.

We need to also put SMSF borrowing into context, SMSF is a $600 billion industry of which only 3% is LRBAs. 3% of $600 billion is a small chunk of the pie – yes its growing but still small in the overall context of the industry.

My opinion is to limit the impact of spruikers we should limit LVR on Off the plan to 50% – this should put a kick up the butt of certain spruikers.

Hope that helps.

Cheers, Ivan

Disclosure – I am a SMSF professional and registered auditor and a large part of Redwood is SMSF – therefore I have a vested interest – but try to present a balanced view.

Lots of relevant points have already been raised.

As Redwood has mentioned, some folks have fallen prey to overpriced off the plan stock.

It is important to have some visibility on running costs of an SMSF, rather than dismissing the idea just because someone said to, without factual and numerical reasons provided.

Annual accounting fees of an SMSF, depend on the fee structure the accountant, might be $1,100 or $11,000 depending on how much mickey is being taken. Other annual fees from ASIC in a SMSF would amount to circa $300 in a SMSF that has one property only which is under mortgage.

If you take the example of a person who has say $100k in super. It is necessary for this balance either to rise, or to provide a reasonably consistent annual income when retirement day comes, or a combination of the two. Because these days, $100k would buy you around 3 years of living costs before you run out of cash.

Let’s pretend a person finds on retirement day that the $100k had tripled in value to $300k. That buys them around 9 years before the capital is chewed up. Or if you try to live exclusively off bank interest, you are staring down the barrel of trying to live for sub $5k per annum. Scary. In contrast, the person could look at the option of using the money to acquire a modest property in super, using an 80% loan. Let’s say this property is returning $350 per week in super today, that inflation does not exist, and that rents do not rise. $350 per week in rent, by the time a mortgage is paid off, is a gross rental return of $18,200, or an approximate net return of $13,286. Again, can you live off $13k per year? Unlikely. However this is a much bigger chunk of the amount a person requires per annum for cost of living than the prior example.

Figures are approximate, not guaranteed and all other such disclaimers. But hopefully this helps a few folks think about their super more logically then blindly doing or not doing something “because someone else told them to, or not to”