Australian’s generally love property ownership. Directly held property makes up approximately 19% of all Self Managed Super Fund (SMSF) assets, indicating that many trustees consider it’s an important and significant part of a diversified portfolio. There are numerous strategies and ways for property to form part of an SMSF’s investments and each must be carefully considered.
Investment strategy first!
Before any investment decision, it is imperative and a legal requirement that you as an SMSF trustee must consider your investment strategy. Your strategy framework should detail such things as how much exposure you would like to the property market, the form of exposure and how appropriate it is for your current circumstances. A well-diversified portfolio is essential to provide income for retirement and spread investment risk so that any single asset class, such as property, does not dominate your SMSF risk and returns.
A common form of property exposure is direct investment into a property. This can be in the form of either a residential property or commercial property. When purchasing a property with an SMSF’s cash there are some important considerations that must be worked through including:
- Your asset allocation and diversification.
- Potential rental income and property expenses.
- How close you are to retirement and the need for liquid assets to pay pensions.
- Unless the property is a business real property (BRP) you or your related parties cannot use the property:
- If the property is BRP you may be able to work from the premises which is owned by your SMSF.
- You may also be able to utilise the small business CGT concessions and contribution limits.
Limited Recourse Borrowing Arrangements (LRBA)
SMSFs may also invest in property through an LRBA. These are complex borrowing structures which allows SMSF trustees to take out a loan from a third party lender. The SMSF trustee then uses these funds to purchase a property to be held on trust. The lender only has recourse to the property held in the trust – this is why the loan is “limited recourse”.
An LRBA should only be utilised when it is the right structure for your SMSF on the basis of SMSF Specialist advice. Some very important considerations in addition to the ones above include:
- Can your SMSF maintain the loan repayments over a long period of time considering asset returns, interest rates, liquidity, and contributions caps?
- Evaluating set-up costs and structures.
- Is your property valuation accurate?
- You cannot use borrowed money to improve the asset or change the nature of the property at any time.
- Do you meet the strict bank lending requirements?
- Typically, lenders require the SMSF to have a minimum of net assets of $200,000 or more and for the loan to have a loan to value ratio below 70%.
Another way to gain exposure to property for SMSFs is through indirect investment. This can include listed invested vehicles such as, listed investment companies and exchange traded and unlisted property funds and syndication. Managed investment trusts are also a common investment for SMSFs to gain exposure to property. Investing indirectly may suit your SMSF needs more than a purchase of a property because it is relatively simple and most likely will not require a large amount of capital. It also allows your SMSFs to get exposure to large value properties such as office blocks, shopping centres and industrial properties that would otherwise be out of reach.
Before diving into any investment make sure that you seek out advice and confirm that it meets your needs and objectives.
If you want to discuss these options further or get a second opinion on your current strategies contact our office today.
Seek out further advice and start your journey to being free around your money and creating wealth with understanding.
Scott Malcolm has been awarded the internationally recognised Certified Financial Planner designation from the Financial Planning Association of Australia and is Director of Money Mechanics. Money Mechanics is a fee for service financial advice firm who partner with clients in Melbourne, Canberra and Sydney to achieve their life and wealth outcomes. We are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.
Renewed volatility in markets has awoken the media from its summertime slumber.
Everyone has an opinion about what caused this latest bout of volatility in markets, coming after a long period of relative calm. But the key point for long-term investors is that markets are volatile by nature. Stocks go up and down as information and expectations change. Sometimes, this happens very gradually. Other times it happens more suddenly.
What you can be sure of is that everyone is an expert after the fact. A few weeks ago, you might have heard experts saying markets were in party mode, fuelled by a cocktail of accelerating global growth, strong earnings and low inflation. Now, they say this was an accident waiting to happen as central banks take away the punchbowl of low interest rates. Well, which is it?
The point is there are any number of reasons markets may rise or fall on a given day. It may be fun to speculate about the drivers, but ultimately it makes little difference if you are a long-term investor. And reacting impulsively to daily market movements is almost always counter-productive.
Increasing market volatility is essentially an expression of uncertainty. Markets move on new information which is incorporated into prices immediately. Those prices reflect the aggregate views of millions of participants, so unless you have information that no-one else is privy to, you are unlikely to get an edge by trying to time your entry and exit points.
What matters for individual investors is whether they are on track to meet their own long-term goals detailed in the plan designed for them. Unless you need the money next week, what happens on any particular day is neither here nor there. It is the long-term returns that count.
As to what happens next, no-one knows for sure. That is the nature of risk. In the meantime, you can protect yourself against volatility by diversifying broadly across and within asset classes, while focusing on what they can control – including your own behaviour.
For those still anxious, here are seven simple lessons to help you live with volatility:
Don’t make presumptions.
Remember that markets are unpredictable and do not always react the way the experts predict they will. For instance, you’ll see economists on the TV every night talking about what might happen when Europe or Japan eventually raise interest rates. But even if you could pick the turn, you still don’t know how markets will react. It’s pointless to speculate.
Someone is buying.
Quitting the equity market when prices are falling is like running away from a sale. When prices fall to reflect higher risk, that’s another way of saying expected returns are higher. And while the media headlines proclaim that “investors are dumping stocks”, remember someone is buying them. Those people are often the long-term investors.
Market timing is hard.
Recoveries can come just as quickly and just as violently as the prior correction. In 2008, the Australian share market fell by nearly 40%. Some investors capitulated, only to see the market bounce by more than 37% in 2009 and rise in seven of the eight subsequent years. The lesson is that attempts at market timing risk turning paper losses into real ones and paying for the risk without waiting around for the recovery.
Never forget the power of diversification.
When equity markets turn rocky, other assets like highly-rated government bonds can flourish. This limits the damage to balanced fund investors. So diversification spreads risk and can lessen the bumps in the road.
Markets and economies are different things.
The world economy is forever changing and new forces are replacing old ones. This applies both between and within economies. For instance, falling oil prices can be bad for the energy sector, but good for consumers. New economic forces are emerging as global measures of poverty, education and health improve.
Nothing lasts forever.
Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.
Discipline is rewarded.
Market volatility can be worrisome, no doubt. The feelings generated are completely understandable. But through discipline, diversification, keeping focused on progress to your goals and accepting how markets work, the ride can be more bearable. At some point, value re-emerges, risk appetites re-awaken and for those who acknowledged their emotions without acting on them, relief replaces anxiety.
After the massive changes to superannuation which begin from 1 July 2017 and which we are all still trying to digest and implement this year’s Federal Budget is light on big changes, but as they say the devil is always in the detail!
This is a little bit of a lengthy article but we have provided some of the highlights to Budget 2017, so grab your morning coffee or tea and if you have any questions please do not hesitate in contacting me at the office.
Before reading the below note that these are only announcements and will require passage through Parliament before being legislated.Read more
With end of Financial year just around the corner it is time to review and upskill about the new financial lingo in the Superannuation System and how these changes will impact you.
While the Federal Government keeps using the Superannuation System to balance the Federal Budget, you need to keep a flexible approach.Read more
Check out the podcast from our chat with David Koch on Business Builders 30 March 2017.
All about the importance of Small Business owners paying themselves first and strategies to build your salary into the business.Read more
With 2016 almost at a close the analysts and economists are commenting on what they expect the New Year to bring in investment markets. We have prepared the following blog post based on commentary from Chief Economist Dr Shane Oliver at AMP Capital Investors and the Research Team at Vanguard.
Dr Share Oliver Comments:
- 2016 started badly for investors with worries about global growth and deflation. But global growth turned out okay &, despite political events, rising bond yields & disappointing Australian growth, the end result has been a constrained but okay year for diversified investors.
With the holiday season fast approaching, it’s tempting to throw out the year’s planning to engage in some fun consumption. But getting into the spirit doesn’t mean you have to go into debt.
Follow these tips to start 2017 debt free.
Set a cash flow plan
First take some time out to review your current finances (if you want a copy of our Cash flow planner email the office) Determine how much you can realistically afford to spend without going into debt for it! Remember to include gifts and entertainment as well as all the small things that come with the season like cards, stamps, decorations, food and travel. Also consider some more creative gifts to give that don’t cost you money…Read more
On Wednesday 9 November 2016 the Government introduced its superannuation legislation which makes changes to the superannuation laws it originally announced in the 2016 Federal Budget.
Most of these changes will apply from 1 July 2017 so it might be sensible to for you to start thinking about how your superannuation will be impacted by the changes now and whether you might need to change any of your SMSF’s arrangements.Read more