5 Mistakes on Self-Manged Super (SMSF) Property Investment

Deciding on getting into property investment through the self-managed super fund or SMSF is something worth considering. If you take into consideration the volatility of the stock market, low-interest rates, and tax concessions, it makes a lot of sense. So what do you need to know?

 Here are 5 Common Mistakes when considering property investment through SMSF

1. High leverage on SMSF property investments
   • Heavily rely on bank loans when investing property within SMSF might be problematic. High loan-to-value ratio (LVR) could be feasible when investing elsewhere but SMSF loan is more strict and less options in loan market. Most lenders require positive cash flow (i.e. no Negative Gearing allowed) considering acquisition of property in SMSF.
   • Having a combined balance of $200,000 for husband and wife investors could be a starting point of thinking property strategy in SMSF. 
   • The loan-to-value ratio is lower for an SMSF loan than for residential property from most of the lenders. You would need a 25-30% or more deposit when borrowing to buy a property.
   • Lenders view SMSF loans as riskier, and hence a high-interest rate because they consider it a commercial loan even if it purchases residential properties. 

    

2.  Buying an inappropriate property
   • Not getting a good return on investment, invest in areas that overly supplied or show inconsistent capital growth.
   • Balancing with right rental yields and capital growth is critical. Thinking high capital growth without required rental income leads to insufficient cash. 
   • Investing in bad or volatile areas could make you lose your money quickly.
   • Consider supply vs. demand. You will get good rental returns if you get a good location with low supply

    

3. Carefully buying off-plan in SMSF
   • Buying off-plan can be a risky move if you do not do your numbers correctly.
   • Undertake a cash flow analysis into your fund with a buffer because you might guess wrong after a few years when settlement, it might not be as what you thought initially. For example considering higher interest rates and lower rental income when doing the analysis.
   • Improper valuation and conservative quotes by banks can lead to problems in future. 
   • If you must buy off-plan, purchase somewhere with strong demand and solid rental return. You avoid the oversupply of apartments that are prevalent in some areas.
4. Too late to start SMSF property investment
   • Aim to invest for long term (a minimum of 10 years), before the retirement age of 65.  Never too early to start SMSF just to do the maths right. 
   • If possible, start as early as 45 to realise the true potential of investing
   • Investing in property is typically for 10 to 20 years; banks are wary of short-term loans
   • If you are pooling funds from other members, you must also consider their ages, how close they are to retiring, risk tolerance and your ability to manage the funds to the advantage of all members

    

5. All in property is risky
   • Property is good investment asset to be held in super, but still needs to diversify.
   • Right level of cash reserve mixed with other liquidiable investment is healthy strategy just because real estate is not liquidable asset with a higher transactional cost when selling.
   • Diversify your SMSF to have a well-rounded portfolio
   • Have a good buffer of assets and only invest in property when you have sufficient resources

Do you need professional assistance for your next investment? Call BOA & Co. accountants in Chatswood on 02 9904 7886 and our specialists will be pleased to assist you.

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