Changes to self-managed super rules make bricks and mortar more appealing.
Not many people do it but investing in property through a do-it-yourself superannuation fund can be a winning move.
Studies show the long-term returns from housing and shares are about the same: an average 11.5 per cent a year in the past 80 years. There’s another plus, too, when you hold part of your super in bricks and mortar.
The strategy broadens your asset base and offers some protection from the ups and downs of the sharemarket. You need to be cautious, though.
The property lending rules for DIY super schemes are complex and the many pitfalls can easily trip up the trustees of self-managed superannuation funds (SMSFs).
For example, all the money used to acquire a property for an SMSF must come from the fund. If the trustees of DIY super funds pay a deposit out of their own funds, intending to have the fund reimburse them, they end up paying higher stamp duty.
Finding a lender who’ll back you isn’t easy, either. The managing director of Wakelin Property Advisory, Monique Sasson Wakelin, says SMSF trustees shouldn’t try to second-guess what assets lenders will advance money on.
”You have to be more conservative in your selection process with a super fund because of the rulings that go hand-in-hand with super,” she says.
”We won’t buy any property for a client [that is going to be put into a super fund] that is less than 50 square metres in size.
”Some banks won’t lend against it because of the more conservative lending structure they apply to super funds.”
The Tax Office’s rules for lending to SMSFs stipulate that until the asset is fully paid for, it must be held in a separate security trust. Setting up this trust adds about $2000 to the cost of the transaction.
The loan must be non-recourse. This means that if the borrower defaults, the lender can take possession of the asset used as security but no other assets of the fund.
Because of this, interest rates on SMSF property loans are often higher than standard mortgages.
So what should you buy? Properties that go up in value and produce an income without you having to put in substantial extra funds for improvements are your best option.
Ms Wakelin favours inner-urban houses and units in good streets away from main roads. She says careful selection is vital, because if property in a self-managed fund slips into negative equity the problem is difficult to fix and retirement earnings will be hit hard.
It’s been possible to borrow to buy property through an SMSF since 2007. Last month, the government made this area even more attractive by relaxing the rules on upgrading super fund-owned properties.
A word of warning, though. In the pension allocation phase of an SMSF, a minimum amount of the fund must be drawn down. Anyone aged 65 must withdraw 3.75 per cent during the 2011-12 financial year.
If the yields earned by an SMSF-held investment property are low, investors might need to rely on other investments in the SMSF, such as shares and term deposits, to make the minimum drawdown.
Also, don’t forget that property is an illiquid asset and that owning assets that can quickly be turned into cash is more important when you’re older.
”If you’re of baby-boomer age, you have to be sure that what you are investing in is the right thing,” says chartered accountant Sue Prestney, principal of MGI Melbourne.
”Logic says that if you are at an age where you might be starting to access your benefits, having everything tied up in a property is not what you need.”