Melbourne went through a spectacular property development bubble in the late nineteenth century. When the bubble burst there was gallons of blood on the floor and many prominent and well-respected people took the quick route away from their financial problems.
At the market bottom, it was possible to purchase whole streets of vacant blocks of land for a pittance in the now up-market Glen Iris.
You can read all about this property bubble in a fabulous book by Michael Cannon called The Land Boomers, which was first published over 35 years ago. I consider the book essential reading for anyone interested in markets and while it’s out of print, it’s still possible to find second hand and in libraries.
As SMSF trustees, our job is to invest in various financial markets and the more knowledge we can have about them, the better our investment decisions will be.
In a broad outline of human history, the widespread use of markets and free enterprise is a relatively recent phenomenon – in fact probably little more than the last 200 years. From this I conclude that our knowledge of markets and how they operate isn’t much more than skin-deep. You can add to this humanity’s constant inability to learn from past mistakes and the certainty that similar, but not exactly the same, problems arise.
I was reminded of this when reports began to emerge in the late 1990s that the US residential property market was going gangbusters. For over ten years property prices in other markets, for example Ireland and Spain, had also skyrocketed.
The US, Irish and Spanish property booms were never going to end well, but as the saying goes, one man’s pain is another man’s gain.
It hasn’t taken long for SMSF investors to think about purchasing US property, especially since they have been more or less giving properties away in some places like Detroit, much like Melbournians did in the late 1800s. In Ireland, residential property is said to have fallen by over 50% from its peak in 2008 and Spain is in a similar house of pain, if you’ll pardon the expression.
If you’re interested in using some of your super fund’s money to invest in overseas real estate, there are a number of issues you need to consider.
You must be prepared to own the property for many years. It’ll take a long time before these markets stabilise and begin to grow again.
Before purchasing a property make sure you understand the regulatory structure of property ownership in your chosen jurisdiction. Irish and US property ownership is based around land titles just like Australia but not all countries use this system. In any case, all jurisdictions have their own unique property ownership rules.
Presumably you would like to rent out the property. But given there is a glut of vacant properties, it may be difficult to find a tenant. Whatever occurs with your own overseas property investments you’ll need to make sure your fund’s investment strategy reflects reality. If your fund needs income from the investment but you can’t find a tenant, then how long would you hold the investment?
In my view it’s unwise to purchase real estate without seeing it firsthand. Unfortunately, I’m aware of many investors who have purchased poorly because they failed to visit the property prior to purchase. Real estate is always about location, location, location and you won’t know the location unless you physically look at it.
A question here will be: can you visit your property using the resources of your super fund? Potentially yes, as long as the expenditure is solely to discharge your duties as a trustee. I suggest you seek SMSF Specific Advice from the Australian Tax Office (ATO) before proceeding.
As you’ll be an absent landlord you will need to make sure you have a local who will act in your best interests. Locals may not look after a foreigner’s investment as well as they would a fellow citizen’s property (Australian businesses wanting to expand overseas regularly find this problem with their staff).
And finally you need to understand the Australian tax laws for foreign property ownership. All income and capital gains will be taxed in Australia but any tax paid in the local jurisdiction will be taken into account if there is a double tax agreement between Australia and the country in question. The foreign income and capital gains must be converted into Australian dollars using exchange rates determined by the ATO.
Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.