Buying property within a Self-Managed Super Fund (SMSF) has never been so popular with Australians taking back control of their super. The ATO’s March 2014 SMSF statistical report shows that investment in residential property through SMSF rose 17.2 per cent to $20.5 billion in the 12 months to 31 March 2014.
The main point remains though, while Australians are buying property in their SMSFs for a variety of reasons, it is vitally important to buy a quality and extensively researched property that has all the credentials to perform in terms of capital growth and rental yield.
The 3 non-negotiable traits for a successful SMSF property investment
- Does it comply with regulations and suit your investment plan?
Trustees of SMSF’s have responsibilities to ensure they are setting up the fund for the sole purpose of planning for their retirement. It’s important to get independent financial advice should you be considering setting up a fund as there is significant regulations around what can and cannot be done with property within SMSF’s. Those restrictions include rules around personal use and changes that can be made to the property plus more.
- Does it offer low costs and strong yields?
If, like most of our clients, you are considering borrowing within your SMSF to buy property (the method to do so is called a Limited Recourse Borrowing Arrangement or LRBA) then low costs and strong rental yields are vital. Borrowing within your fund requires you to be able to pay back the loan using the contributions you make to the fund. These are normally made up of the amount of super you contribute plus the rental received from the property. Most banks then use a factor of at least 1.5 times those contributions to gauge whether you will be able to repay the loan.
- Is it located in an area with above average potential for growth?
Your age, how long you require before drawing on fund plus the goals you have set for your SMSF are all factors that need to be considered before selecting a property for your fund. Buying the property next door, because your property has done well in the past is not the way to go. Melbourne is changing markedly and the types of properties that will perform in the future are not the same as the properties that performed well in the past. Research is the key along with understanding the demographic and planning changes Melbourne is undergoing.
Buying residential or commercial property within SMSF’s can offer great returns but you have to be sure to seek independent financial advice in addition to quality property advice prior to doing so. This will ensure you minimize risk and maximise the gains within that fund and ultimately offer more bang for your buck in retirement.
Bill Nikolouzakis – Nyko Property