Use of SMSF to buy Property outright

JDL,

In terms of investing in anything, whether it be property, shares, term deposits etc, whether it’s inside or outside of super, you need to evaluate each invest on its merits, i.e. is what you are investing in going to give you a suitable return compared to your initial investment.

The next thing you need to ask yourself, is does the person who is telling you to invest your money in a certain asset have a vested interest? i.e. Is there advice influenced by what they may receive by you investing your money in a particular asset. As Terry alludes to, the financial adviser may receive a commission/ fee for getting you to buy a particular property, hence their advice is biased. Are they pushing you to buy a certain property? If they are, that would set off alarm bells in my mind.

If you are unsure, i would definitely seek a second opinion.

As Terry and Richard have said, there isn’t sound logic to this advice. An income-producing asset that produces only 3% per annum is very low return. Perhaps the property will grow in value, perhaps it won’t. If it does then in theory if you need to sell it one day you could crystalize your gain by selling it and live off the cash pile till it runs out. Leverage (borrowing) is powerful in that it doesn’t lock up all your cash but instead uses someone else’s, while you in theory enjoy the capital gains for a while.

It’s hard/impossible to know whether one strategy over another would cripple you financially or just put a tiny dent in your extravagant retirement lifestyle without knowing more about your overall position.

As Terry indicates, if they are pushing hard then what’s in it for them is probably substantial, and not necessarily in a strategy that is best for you.

If you are able to comment more on your overall position, we might be able to say something more useful.

If you have $500k in super then it would make more sense to set up SMSF – generally. This is because when you look at all the fees in the industry fund they will add up. It may cost less than $2000 pa to run your superfund. But you will have much more control and many more strategies at your disposal. Imagine you were to die now, it would be the trustee of the industry fund that decides where your super can go. At least with a SMSF you can plan ahead.

Just don’t invest in property directly through a sales person.

To be frank, I wouldn’t be going into an SMSF unless you are very comfortable with the superannuation laws, your obligations and generating your own returns.

Look for another financial advisor.

JDL wrote:

Hi, I am looking at a new Financial Advising service and they are pushing hard to use almost half of my superannuation fund to buy a property in full, to provide a safe return and capital growth for the future. I am 62, so there I am close to approaching the need for retirement income. They give an expectation of around 3% income return on the property?

Is this a logical way to invest my super fund at a time I approach retirement and will be looking for income? Appreciate any advice or input please?

Hi JDL – A SMSF property should provide a 4.5% yield to be viable for resi property with a borrowing (but you mention buying property in full) – anything less is a no-go (in my opinion).

You should have a diversified portfolio yes – but there a number of considerations to determine the right property, a 3% yield is a key indicator that the property is not right.

Re retirement – strategy is king – Transition to retirement is important to consider to maximise tax benefits, take your time, seek a different opinion that the voice provided, SMSFs aint for everybody and using the vehicle will require significant understanding of superannuation law or a independent advisor/ accountant to assist you on your journey.

In summary – go elsewhere. Be free to google the firm you are seeing and add the word ‘scam’ see if anything pops up …

Cheers Ivan