Australia can lay claim to having the fourth largest collective pension fund in the world, totalling $2.6 trillion dollars. The only countries boasting larger funds are Japan, the US, and the UK.
Moreover, 30% of our collective superannuation savings sit in Self Managed Super Funds (SMSFs).
Unlike industry funds, a SMSF provides investors with the maximum amount of flexibility as you have a broad choice of asset types to select from. SMSF’s are not for everyone, and only those people willing to continue to educate themselves about investing and the changing regulatory environment should take this step.
The DIY case for property
While SMSFs are not new, the ability to use DIY super to borrow is a relatively new amendment to the law enabling more people to invest in bricks and mortar.
Besides, property is a more stable asset class than shares, and less volatility provides more investment control.
There are some very valuable tax benefits from buying a residential property through an SMSF too, including:
Be mindful your entire retirement nestegg shouldn’t be centred on one asset class. By spreading your money across asset classes, it is possible to safeguard against underperformance by one investment class.
Also, when you retire and start receiving your super pension payments, you can sell your family home, and use the proceeds to buy the investment property from your SMSF. Then sit back and enjoy your twilight years in your dream property!
But an SMSF isn’t a licence to print money, and there are rules to follow. For example, your SMSF can only be used to buy either an investment or commercial property. It can’t be used to buy yourself or a family member a property. The property must be rented out to tenants outside of your family.
While an investment property should provide steady monthly cash flow, the property might be vacant for a period. You also have the ongoing maintenance expenses, which must be covered by your rental income.
Ultimately there are clearly many benefits associated with purchasing an investment property through an SMSF. However, we’d advise speaking to your financial advisor before making any decisions.
Funding a SMSF investment
The lending landscape for SMSF’s has changed dramatically over the last two years, and many lenders have left or reduced their exposure to this market segment.
There has been plenty of negative commentary about the encouragement of uneducated investors to establish SMSFs and borrow funds against off the plan developments that don’t stack up financially.
There are several non-bank lenders that are still operating in this space. Rates vary, and while on the surface look attractive, there are hidden fees to be aware of such as application and ongoing fees. These fees can vary dramatically from lender to lender, which can hide the true cost of the loan. Again, a good mortgage broker such as Our Broker, can help you through the minefield of lenders and identify the best product that meets your needs.
To find out more about borrowing within your SMSF, contact Our Broker on 02 8232 0327.