It was with interest that I read an article in the Australian earlier today commenting on the surprisingly low estimated 5000 SMSF's that have taken up the opportunity to gear into property.
This is of course a surprise, considering that there is an estimated 460,000 funds out there, with what appears to be more than enough capital to invest. Perhaps though the SMSF Trustee and member is just not so sure right now whether property is the place to be? Does property offer a better safe haven than the currently volatile share market? Does it offer as safe a place as cash?
Perhaps the real issue is that when you start thinking about gearing into property, you end up having to decide to use most of your capital potentially together with a mortgage, to invest into one property in one suburb in one city. Not too sure how diverse an investment strategy that may be. And we have to believe that trustees and members are realistically concerned about putting too many eggs into one basket, especially off the back of their experiences over the past 5 years.
We are not saying don't do it, and some members of the press are speculating that more people will be doing it going forward. Our message is be careful and don't join the crowd and be a lemming. Lemmings often end up on the wrong side of a cliff.
Why you may say? Well, in a recent AFR TV discussion with SMSF Education Chair, Warrick Hanley, we discussed the concerns around liquidity, particularly in cases where SMSF's gear into property. Let's paint the picture. Your SMSF buys a property through a limited recourse loan. The SMSF has two members, who are also partners in a business and the property is the business premises. The partners pay their super contributions into the SMSF and the business pays rent - all to assist in servicing the loan.
What if there is a divorce? What if the partnership breaks up? What if the business cashflow struggles? Seen any of these things happen recently?
The moral of our story is yes it is possible to buy a property in your SMSF, and yes it is possible to use a limited recourse loan structure to do so. But please, please seek some genuine professional advice around the estate planning and cashflow issues. Get someone who will tell you honestly what the risks are, and with respect, that may not be the real estate sales person, or the journalist.
This website is all about providing you with the power as Trustee and Member to make informed decisions. Make sure you make the right one.
