Puzzle Finance Blog

Building for retirement

More self-managed super fund holders are leaving shares for property.

Many Australians have the financial goal of owning at least one investment property, so it's little wonder that more of us are using superannuation to invest in bricks and mortar.

According to superannuation software developer Bravura Solutions, more than $14 billion in superannuation moves out of existing funds and goes into new or existing do-it-yourself super funds each year.

Many people who embrace DIY super are choosing to escape the sharemarket allocations of retail and industry funds and want to find stable income streams.

Rent from tenants can work a treat in this regard. But if you hold property in a self-managed superannuation fund (SMSF), you need to be across the following issues

Stick to the rules

A key benefit of buying property through super is that once you're on a pension, you can sell capital gains tax-free. However, a SMSF is essentially a trust that must be run according to the rules that govern superannuation and lawyers say some trustees are ignoring rules on SMSFs borrowing from related parties.

Peter Townsend, of Townsends Business & Corporate Lawyers, says if a related party lends money to the trustee of the fund, it has to be a real loan, not a paper transaction. ''It has to be a properly documented loan and actual funds have to be paid over by the lender,'' he says.

Be flexible

If you or a relative live in a property purchased by your super fund this will breach the ''sole purpose'' test and make your fund ''non-compliant''. But Cameron Yates, the director of sales at Hamton, which is building the Haven on the River apartments in Abbotsford, says an owner can relocate to a SMSF property once a fund moves into the pension phase.

''Some of these smart owner-occupiers [buying apartments at Haven] are purchasing through their SMSF and renting out the apartment,'' Mr Yates says. ''They get to move in during pension phase capital gains tax-free and also sell their family home CGT-free.''

Focus on income

Ideally, you want an income stream and a solid capital gain from a super-held property. That's not always achievable, though, and you may be better placed concentrating on rental income. Clare Monkley, the director of Love Finance, says a lot of people aged 48 to 55 look to include property in a DIY fund. Because of this time pressure, Ms Monkley says they may not reap a profit from the normal upswings of the property cycle.

If someone approaching retiring age holds a property for only six or seven years they may generate little capital gain. ''We are more focused on getting the income into the fund, so the rent goes in with contributions from the employer,'' she says.

Think like a tenant

Because income is so important, buying a unit or house that will maintain its appeal to tenants is paramount. Buyer's advocate Melissa Opie of Keyhole Property Investments says vintage flats are ideal because they're sought after but scarce.

''They also have a high owner-occupier appeal, which is imperative for investors who must always consider their exit strategy,'' she says. ''You have to look for blue-chip assets that attract the right type of tenant and maximise rental return.'' Ms Monkley agrees that buying something with strong tenant appeal is vital, but favours residential properties in regional centres priced below $350,000.

Posted by Chris Tolhurst - Domain (Fairfax Digital) on 17th November, 2012 | Comments | Trackbacks

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