You may have heard about the recent turnaround in property prices that we’re currently experiencing around Australia, following some rather average years of capital growth. The main drivers of this new growth are investors, which is a rather unusual situation. Historically, capital growth tends to be kick started by First Home owners entering the market, followed by occupiers upgrading and then the investors tend to enter.
What’s different this time?
Well, the First Home owners are sitting on their hands waiting for the government incentives to be sweetened up. On top of this a large number of the First Homers entered the market ahead of schedule when the incentives and interest rates offered post GFC were just too enticing to resist.
With interest rates close to all time lows, property affordability close to decade low levels, rental vacancy rates averaging around 2% and rental yield growth exceeding inflation, it seems that investors have decided that this is an opportune time to re-enter the market.
Add to this the recent changes to legislation that allow Self Managed Super Funds (SMSF’s) to borrow to purchase property and you suddenly have the perfect situation to entice the property investors back into the market.
All the figures that we’re seeing from the likes of the RBA and the big 4 banks are supporting these observations. Most interesting is the fact that a large % of these loans are being made to Self Managed Super Funds, which is what we’re experiencing in the field.
Why the big increase in borrowings by SMSF’s?
Although the legislation changes to allow the SMSF’s to borrow have been around for a few years now, the momentum has only recently started to build. The sudden surge has been caused by the following:
– The development of lending products by the various institutions. These products took time to develop and even still not all lenders, including some of the big 4, have SMSF products.
– Like the lending products, it took investors and their advisors some time to obtain an understanding of what the rules were with the legislation and what a fund could actually invest in and how to go about it. Once they were comfortable with their knowledge, the number of new funds grew exponentially.
– Investors became tired of the poor returns and volatility that their hard earned super funds were returning, while sitting back and watching those pitiful returns being chewed away by management fees. In the past, many investors felt they didn’t have the time or knowledge to manage and administrate a SMSF. Being allowed to invest in property has changed that. Investors are now feeling more confident with the management and administration obligations of a fund with the predominant asset being a property.
– Investing in property is one of the most tax efficient investments available to any investor in Australia. Investing in property via a SMSF, is even more tax effective, which only enhances the returns that can quite conservatively be achieved. The tax planning opportunities are just enormous.
– Many Australians have recently woken up to the fact that their retirement savings are going to be inadequate to retire on. It’s estimated that 84% of Australians will retire on less than $21,000.00 per annum! The ability to have some gearing in your superfund allows the investors to enhance the returns on their superfund, without increasing the risk profile substantially.
– As time has gone by, both Advisors and Investors have become fully aware that SMSF’s offer great flexibility. SMSF’s aren’t only restricted to investing in one single property, they can also invest in Unit Trusts, Partnerships and Joint Ventures which opens up a number of opportunities that were previously unavailable to the average investor.
– The current market environment with very low interest rates and housing prices at mid 2000 levels provided the perfect set of indicators to enter the market for a long term investment.
So how can you take advantage of this?
Most people think they don’t have sufficient superannuation funds to establish a SMSF, with the common thought being that you need a minimum of around $140,000.00 in superannuation to make it cost effective. What they don’t realise, is that a SMSF can have up to 4 members. So we’re seeing a situation where friends and family are pooling their funds together to establish a SMSF. Individually they may not have sufficient funds to make it work, but collectively they may have enough.
Further to this, you may not have what’s considered enough funds at the current moment. However, if you’re confident about your employment or income earning potential, then you may be able to establish a superfund with less funds than is currently thought cost effective. Once established you can quickly build to the required level with superannuation contributions from 4 members and rent.
Lenders will advance anywhere from 70 – 80% of the property value to assist a SMSF acquire a property. This means for a $500,000 property the SMSF should probably have a balance of around $130,000, which will cover the deposit, settlement costs and leave some cash to operate on a daily basis. One thing that many investors don’t realise is that money can also be lent to the Fund by a member, or even an external individual, separate to the main lender. These funds can be used to meet settlement costs and provide daily operating costs until the members can contribute enough superannuation to create a cash reserve and then proceed to start paying the loan funds back.
As you can see, the opportunity to establish your own SMSF and purchase property is perhaps more of a possibility than what you may have first considered. If it’s something that you think may fit your current investment strategy, then it may pay to consider further.
Now having said all of the above, I need to highlight three points:
- It’s very important to ensure that everything is done correctly in firstly establishing a SMSF or, if you already have one, ensuring that it’s compliant to borrow.
- Ensure that you have your strategy and finance approved well before making a bid on any properties. Arranging and settling finance for an acquisition via a SMSF takes substantially longer than for any other type of purchase and is assessed differently to a normal property acquisition. The assessment policies, costs and legal requirements also differ significantly between different lenders.
- It’s very important to ensure that you have a full understanding of the rules associated with establishing, running, administrating and investing via a SMSF as breaches of the respective legislations can be extremely costly.
If you would like to learn more about this topic, follow this link to another article that we prepared on this topic .. https://capitalfunding.com.au/self-managed-super-funds-and-investing-in-property/
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Article by Shayne Fergus, Director of Capital Funding Group
To read more on Shayne Fergus please click here
