Pitfalls of property investment through SMSFs

There’s a bit of fuss happening at the moment about buying property in a Self Managed Super Fund.

According to Robert Gottliebsen in The Australian:

“What concerns many people, whether they invest their money via big industry/retail funds or self-managed funds, is that they can’t get enough money into the fund to finance a decent retirement. 

“Accordingly, leveraging a self-managed fund offered an opportunity to break through.

“Such people, and they represented a major part of the workforce, are therefore vulnerable to “get rich” schemes from sales people who suggest high borrowing on property to deliver big net returns.”

And he is right.

While many investors bought wisely, others were taken in by property spruikers and bought secondary properties in the SMSF, or off the plan properties.

The value of some of these properties has fallen considerably and some investors have lost out badly.

An accident waiting to happen

Buying property with your superannuation is an accident waiting to happen, according to RiskWise Property Research CEO Doron Peleg. 

His comments come as Westpac announces it will no longer offer self-managed super fund (SMSF) loans for new consumer or business lending.

While the big four bank says it wants to streamline processes, Mr Peleg believes the real reason is that offering SMSF loans doing so is beyond Westpac’s risk appetite, especially if retirees lose significant amounts of their pension due to failed property investment.

The move means Westpac subsidiaries the Bank of Melbourne, St. George Bank and BankSA will also no longer offer the product.

Over the past few years, Self-Managed Superannuation Funds (SMSFs) have gained such popularity there are now more than 600,000 in Australia, managing around $700 billion in assets.

This is according to figures from the Australian Prudential Regulation Authority (APRA), and the Australian Taxation Office (ATO). In addition, the statistics show us the average balance of an SMSF is more than $1.1 million.

In fact, according to the ATO, in the five years to 2017, SMSF assets grew by $274.3 billion, or a staggering 65 per cent. 

However, the RiskWise CEO says it’s “a dangerous road” as pensioners gamble with their retirement funds.

“It really is a high-risk endeavour, and, in fact, Labor will move to ban borrowing against SMSF if they are returned to power in the next Federal election,” he said.

Borrowing on your super to feed into property is governed by strict conditions known as ‘Limited Recourse Borrowing Arrangements’.

And according to Industry Super Australia, there has been a 200 per cent rise in the past few years.

Avoid off the plan

RiskWise research shows off-the-plan (OTP) properties are very popular with SMSFs, however, many carry a high level of risk largely due to potential oversupply – leading to squashed property values, high vacancy rates and a cooler market. Inner-city Brisbane is a case in point where weakness in the market has led to a high level of risk for investors and therefore lower valuations and rising defaults on settlements. 

“What this means is that many individuals fall into debt they can’t climb out of as their SMSF hits the ‘rock bottom’ known as a ‘property bust’,” he said. 

“The three major types of risks associated with over-supplied OTP high-risk suburbs are Equity Risk, Cashflow Risk and Settlement Risk and they all add up to potential disaster for the anyone staring retirement in the face. Especially as set-up costs for these types of borrowings often have higher fees.”

Mr Peleg said when considering buying property through a superannuation fund it was important to identify loss of income if there was an oversupply in the area and there was a problem finding tenants to rent the property, especially as these dwellings appealed to a limited market and not families with children seeking bigger homes and a decent-sized block.

“Super is the only asset class you can leverage against but using it to buy property is definitely high risk if things go wrong and, frankly, an accident waiting to happen,” he said.

The bottom line:

Self Managed Super Funds are a financial product and as such you need to get expert advice before setting on up or before buying a property in your SMSF.

By the way…estate agents, property marketers and buyers agents are not licenced to give this type of advice.

If you’re interested in understanding is setting up an SMSF is right for you or if buying an SMSF is an appropriate strategy for you, why now have a chat with Ken Raiss and his team at Metropole Wealth Advisory.

Click here now and have a consultation to explore your options.