When purchasing property in SMSF, knowing which property to avoid is just as important as knowing which to target.
If you are considering buying property for your SMSF, my advice is to exercise extreme caution. Before going ahead, make sure you fully understand your strategy and have thoroughly investigated the property in question. The number of banks and alternative lenders that are prepared to allow borrowing for property purchases with a SMSF is falling fast, and with good reason. Property in SMSF is not a game and there are important considerations that require your attention.
Your goals as an investor buying property in SMSF should be, first and foremost, to achieve attractive capital growth. You may then also consider whether or not to operate your business from the property or maintain it as an income-generating investment. Property selection is fundamental to the success of property investment performance in SMSF and it is your responsibility to be mindful of the risks involved.
Achieving positive performance from a property asset in SMSF depends on selecting a property that is suitable
Impacts from poor property selection may include negative cash flow where the costs of maintaining the property exceed funds in the SMSF, and/or the performance of the asset is less than what could have been achieved through other investment options or asset classes.
Investors can mitigate the chances of this problem arising by making sure they fully understand the ongoing costs of holding the property. Two key ‘surprises’ among the ongoing costs for a strata property are:
- Higher Body Corporate fees than initially calculated – particularly if the building is brand new/off the plan, and the developer has ‘estimated’ outgoings but no formal management arrangement has been established.
- Special levies for serious maintenance issues that were either not identified due to limited attention to the contract, or have been set subsequent to the purchase.
Planning plays a key role in minimising risk in any property purchase
You can avoid some of these risks by:
- Seeking legal advice on a contract before signing;
- Obtaining a written rental appraisal from an experienced local property manager who is independent of the vendor’s agent;
- For a strata property, contacting the Strata Manager to discuss current and reported issues, quotes and levies;
- Seeking professional advice to calculate cash flow for the property, taking into account a realistic rental appraisal,associated costs and your financial position;
- Potentially having cash buffers in place within the fund (this needs to be discussed with the licensed professional who sets up and/or manages the SMSF);
- Maintaining a sensible Loan to Value Ratio within the fund (this needs to be discussed with the licensed professional who sets up and/or manages the SMSF);
- Provisioning for increased interest rates, making sure that the cash flow is positive or at least neutral.
Investing in property can be exciting. But choosing to do so in a SMSF for reasons other than sensible capital growth and asset diversification and without taking full account of your personal and/or business situation is not prudent. Involving key stakeholders, including a licensed financial adviser, an accountant, a legal expert and an independent property expert, to set a well-considered strategy, are major ingredients for success.
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Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions.