A SMSF (self-managed super fund) makes sense for a lot of people. Having a say in the performance of your own money is very appealing and the spectacular growth in SMSF balances over the last few years echoes that thought.
By the same token, it’s also important to understand that money in a SMSF is a long term investment. Logically, anything you invest in using your SMSF will only fully accessible when you retire. So it is definitely an investment vehicle that needs to be managed carefully. Let’s face it, not many people are prepared to speculate with their Superannuation and by default, their future.
While there are many ways to invest, I think buying property in a SMSF structure has benefits, but not every type of property.
Lately, I’m becoming concerned with the headlong rush to buy property, any property, inside a SMSF structure. You see, an investment property has certain selection criteria around it. Things like location, postcode demographics, property type, size and suitability, rental return are all important considerations in one way or another.
Naturally, like all investments, what you end up with is determined by what you look for.
It seems to me though, that when SMSF is mentioned, all the proven rules around selecting property get thrown out the door. The selection criteria for an investment property inside Super are just as important as they are outside of Super. Remember, just because you can get finance for it doesn’t mean you should buy it. For example, a $350k apartment in the CBD may not be a better investment than a $500k House in an outlying suburb just because it’s in your price range.
The fundamentals for selection are still the driving force behind investing in property.
What can I do to improve my situation?
The first thing is to recognise that there are options. Rather than settling for a lower value property perhaps you may be better off to explore ways to buy a better quality investment property. By that I mean looking at proven methods to boost your super balance or taking action to allow you to borrow more.
A key aspect here is that the Lender guidelines for SMSF borrowing actually determine the property price. Think about that for a moment.
If the Bank will only give you 60% LVR (Loan to Valuation Ratio), then you have to come up with 40% plus the purchase costs as your contribution. That’s a sizeable chunk of your Super fund tied to a particular purchase.
These conservative Bank Credit Rules will limit your ability to select a property because you have to allocate more of your Super balance as your contribution.
Most of the time this equation means novice investors will buy something with a lower price and consequently a lower long term performance than they otherwise could have had.
Remember, property investing in Super is a long term investment strategy. Clearly, the restrictive rules around borrowing in a super structure mean the selection of a property is critical. Or, to put it another way, quality is more important in Super.
So, one of the barriers to selecting better quality properties could be a smaller balance within your Super fund. Boosting your Super balance can help to secure a better performing property by allowing you to go to a higher purchase price. This could translate into a better result when you come to retire.
Is there a strategy to help me do better?
Like most things, the trick is knowing how to make it work so the benefits flow through for the rest of your working life. More importantly, knowing the rules with something as complicated as Superannuation requires a professional, someone dedicated to helping you achieve your goals.
Some people are closed to the idea of a SMSF simply because they think they don’t have enough money in Super and that is understandable. However, rather than closing off the idea of a SMSF perhaps it’s time to be open to a strategy that could provide long term benefits right now.
Knowing your cash flow, understanding how the Super rules affect your circumstances and having a clear picture of what you want is essential. These elements combine to allow decisions to be made.
Creating a SMSF is not just about setting up an investment vehicle, its opening up a link to your future.
Naturally, you should seek the advice of a licenced Financial Planner when deciding to invest.