BUYING residential property via a self-managed super fund has surged in popularity but warning signs are emerging that suggest investors need to be extra careful.

The recent collapse of Charterhill Group, which was a one-stop-shop for pumping property into self-managed super, has destroyed the life savings of many, and some advisers think more collapses will come.

Last year, the proportion of residential property held in SMSFs jumped from 5.6 per cent to 9.9 per cent.

That’s a big jump, and it’s likely that many of those using the property-in-SMSF strategy don’t have a lot of assets left over to diversify their nest egg after paying for their property.

Real estate is Australians’ most popular investment but putting all your eggs in any basket is dangerous, especially if the bulk of your wealth outside of super is also tied up in property, such as your own home. Sure, shares have been scary over the past seven years, and cash returns have been crappy as interest rates have tumbled, but pinning all your hopes on just one type of asset is a recipe for disaster.

Diversification of assets smooths out your risk and your returns. People can still get exposure to property in their super funds through a wide range of property investment funds and trusts, both in Australia and overseas.

SMSFs are certainly shining, becoming the biggest component of the nation’s $1.8 trillion mountain of superannuation savings. Bout bright lights attract pests, and property spruikers fuelled by greed have been buzzing loudly of late.

Putting property in a SMSF can be a great strategy for some people. Business owners can effectively pay rent to their nest egg, and there are some huge tax savings at retirement, especially if you are a business owner and can transfer your business premises to your SMSF then effectively pay rent to your nest egg.

It can work for others too because of some huge tax savings when it comes to selling the property at retirement. However, the Labor government tried to toughen those tax rules for super last year, and we may see the Coalition take a similar tack in its Budget in May.

Aussies’ affection for property is blossoming in the super environment, but make sure you understand all the risks before taking a lovers’ leap.

Posted by Anthony Keane – Daily Telegraph on 4th March, 2014