You may have the ability to buy property inside your SMSF, you may even have reviewed the risks and strategies that you could undertake to ensure it’s done effectively. But when it comes to deciding where to put your money, many asset classes will be vying for your attention.
So how does property compare?
Back in August 2011, John McGrath wrote briefly about the benefits and pitfalls of property in Super for the Switzer website. So with all respect to John, I would like to further expand on his points and add a few that I believe are key to what makes property an outstanding asset class.
Six reasons to invest in property
1. Safe and stable – Property is one of the few asset classes where even the banks are willing to lend the vast majority of the value of the asset. This is because they generally view property as a very low-risk, steady investment. Prices do not fluctuate as wildly as they do in the stock market, and the market value of property in general is quite consistent. This can be a great comfort for those of you who wish to sleep well at night.
2. Long-term development – Due to the nature of SMSF’s being “self-managed”, the tendency to want to tinker in the allocation and performance of the fund can be quite high. Property does not lend itself to such tinkering. The market is far more long-term and great for investors who don’t have nerves of steel to weather the ups and downs of the stock market.
3. No margin calls – Unlike borrowing to buy shares, borrowing to buy property is not subject to unexpected margin calls. Again, much of this is due to the fact the value of Australian property rarely fluctuates more than 10% over a long period of time. The market is resilient and profitable enough that banks don’t feel the need to continually assess whether they need a “top-up” from the owner.
4. Higher degree of leverage – The power of leverage allows you to control a lot of money with very little outlay. This means gains (and losses) can be achieved in much shorter period of time. There are very few investments as safe and accessible as property that allow such a high degree of leverage, resulting in a return on investment that can far exceed any comparable investments.
5. Control – If you wish to increase the value of your share portfolio, it can be very difficult to directly influence the value of the company itself. With property however, and SMSF property is no exception, you can undertake renovations and improvements that can lead to an increase in the value of that asset. There are, however, strict rules surrounding these improvements if you plan to borrow the money to make them, so pay close attention to the rules.
6. Negative gearing – Many do not consider an SMSF as a vehicle for negative gearing. Yet there is a portion of tax paid (15%) within the Super Fund that can still be offset against any losses that might occur from a shortfall between the rent and the loan repayments. This can effectively result in the tax inside your super fund being reduced to almost zero.
Watch out for these
Property is not all plain sailing of course, and like any asset class, it has it’s disadvantages. Here are a few you will need to consider before leaping in.
1. High entry costs – Given the large deposit required to purchase property, access to property investment can often be prohibitive for many. It is higher again inside SMSF’s due to the need to have additional funds for diversification into other areas in order to reduce risk.
2. Maintenance costs – Although you can’t control the value of your shares like you can with property improvements, you don’t have to repair them either. Ongoing maintenance and repair costs may need to be undertaken with property in order to keep it at a serviceable level as time passes.
3. Longer selling periods – For those of you with your finger on the trigger, equity and bond markets can be a fluid and easily transferable asset to acquire or release depending on the opportunity. Not so with property. Selling a poor performing property can take months and could jeopardize your financial situation if it wasn’t allowed for.
4. Captured profits – Shares can be freely bought and sold within an SMSF, moving from one fund to the next in search of better profit performance. Again, not so with property. Any equity gains that occur from growing property values are trapped within the fund and can’t be leveraged into further investments.
Despite these considerations, many investors feel the positive aspects play a much more important role in the outcome of their investment, especially when considering long-term growth and the low levels of risk associated with property. With careful selection and proper management, many of the pitfalls can be easily reduced or avoided altogether, leaving you with a solid level of performance that can last for years to come.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.