once said “an investment in knowledge always pays the best interest”. When it comes to property and superannuation, not knowing enough about the advantages and disadvantages of such an investment can leave you with an overpriced asset that doesn’t perform as planned. In a market full of property spruikers trying to sell you the biggest and best properties for your self-managed superannuation fund (SMSF), it is crucial that you understand what you are investing in and the potential costs.
isn’t as easy as it is individually. Before 2007, you couldn’t borrow in a SMSF, which meant you had to have a large fund to be able to purchase property. Since then borrowing in a SMSF has made it easier for smaller funds to diversify and invest in the property market. There are obvious benefits in doing this – paying only 15% tax on taxable income; having an asset that provided it is sold when in retirement, incurs no capital gains tax. Even the benefit of being able to touch and see your investment appeals to many SMSF trustees.
With these advantages comes just as many, if not more disadvantages. When you consider investing in property within your SMSFs, additional costs can turn what is a cheap investment into an expensive one. Key costs to keep in mind are fees paid for financial planning advice, accountancy setup costs and advice, and legal fees. Trying to save on these costs can result in minimal advice and incorrect structures put in place. Getting this wrong and having to unwind the structure can often be more costly than setting it up. In addition to this, there are generally higher costs in financing the investments paid to financial institutions. This also needs to be factored into the cost of the investment.
One of the most important and lesser known issues surrounding borrowings and SMSFs is that borrowing can only serve to maintain the property. Should you wish to renovate or make significant changes to the property, you will not be able to do with borrowings due to legislative restrictions in place. This makes it hard to purchase a cheaper property that requires significant work and can limit many SMSF’s options when looking to invest in the property market.
With the current popularity of property in superannuation, you also need to ensure that you not putting all of your eggs in the one basket. Diversification in a SMSF is important in case something goes wrong. With having a smaller SMSF, there is little room for diversification, unless you purchase a property with ‘little rooms’. Many investors make the mistake of looking for a property at the right price and ignore whether that property will be the right investment long term.
Finally, when investing in property within super, you should always seek a second opinion. Independent advice at all levels will ensure that you are fully equipped to make a sound choice that is in the best interest of your SMSF. Doing your own research, especially in unfamiliar regions will help to arm you with the required knowledge to make smart financial decisions with your SMSF.
Remember that whatever you purchase within your SMSF needs to provide for your retirement. The decisions made now will affect the long term growth of the fund and should not be made lightly. An investment in knowledge will ensure that all decisions made aren’t rushed or pressured into. Markets will go up and down, but at least as a responsible trustee you’ll be able to adapt. For that, there is no greater return or interest.
*This advice provided by WSC Group. It is of a general nature and does not constitute specific financial advice. For a detailed financial strategy you should consult with a qualified financial advisor before making any investment decision
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