Investing in property is not rocket science, as most people have had prior experience either buying a property directly, or at least renting a property themselves. However, the rules for buying a direct investment property within super are a very different than buying a property in your own individual name.
While many Australians do have experience when it comes to property investing, you CAN lose money investing in direct property. Irrespective of your prior property investment experience, it is critical to do your research, and understand that any property investment is designed to be held for a long time. When you hold a property for the long term, the chances of making a return can be substantially improved. It is this holding period that makes direct property investing an ideal investment alternative for building wealth inside of super.
The ability to buy property inside of super is one of the biggest advantages a SMSF has over traditional superannuation funds.
1. Is it appropriate?
You need to conduct the necessary due diligence to determine whether any direct investment stacks up. This responsibility lies with you as the trustee. Do not take this responsibility lightly as making the wrong investment decision can have a material impact on your lifestyle in retirement.
2. Check the SMSF investment strategy
Before making any investment, review your SMSF investment strategy to ensure you can invest in direct property as an asset class and whether there are any limitations. You also need to ensure the SMSF deed permits borrowing and allows SMSF assets to be held in a related entity, that is, a bare trust.
3. Be mindful of the risks of borrowing in your SMSF
When entering into any form of borrowing arrangement, you need to understand thatany fall in the property price magnifies the loss. It is critical you seek independent financial advice to determine whether property and any borrowing arrangement is a suitable investment strategy for you in your SMSF. For example, what is your timeframe to retirement?
Yes. Changes to the Superannuation laws made in 2007 mean SMSFs can borrow to purchase real estate using a special structure established for this purpose and so long as you follow the strict legal requirements. Generally, it is possible to borrow up to 80% for residential property and 70% for commercial.
These changes in legislation have resulted in a boom in the number of SMSFs holding direct real property as a means to secure the retirement future of super fund members.