Property has been the number one wealth strategy of the last 30 years in Australia. Buy a home, build some equity and as soon as cash flow permits, borrow more to purchase investment property for others to rent. Unfortunately the days of reaping certain returns through this strategy have disappeared along with the property boom.
With Australia now being one of the least affordable countries in the world in which to buy a home and with the continued uncertain global economic outlook is property still a good investment?
The short answer is “Yes”, but you need to consider different strategies and unless you are a high income earner, avoid negative gearing. The days of large capital gains are gone for now so you need to focus on finding positively geared property that can pay it’s own way from day one.
Australian Property Monitors predicts growth in the housing market of between 3-5% this year but after you remove inflation of around 3%, it’s not an impressive outlook. In this market it’s vital to do your research to understand the area you are buying in, look for affordable properties with renter appeal and be prepared to invest time negotiating to buy well. Also, when gearing, less is more; you don’t want to borrow the maximum, you want to build a cash flow positive property portfolio.
One strategy gaining popularity with many investors today is using their superannuation to invest in property using a Self Managed Super Fund. The ATO figures from Dec 2011 show there are now over 450,000 SMSFs in Australia and increasing by 32,875 new funds last year. SMSFs are allowed to borrow to invest in property by using a structure called a bare trust.
The tax efficiency of superannuation allows for the principal of the property loan to be paid down with pre-tax dollars allowing investors to own the property much faster than purchasing it in their personal name. In many cases the property is paid off in full in only 7-10 years.
Some of the other significant benefits of purchasing property in a SMSF include:
- Reduction of income tax liability through salary sacrifice to quickly repay the loan.
- The asset is held in a structure protecting the asset from any legal claim against you.
- Rental income is paid directly into the SMSF and as such is taxed concessionally.
- The 15% super contributions tax can be significantly reduced or eliminated through deductions within the fund.
- In retirement after age 60, income derived from assets held within your SMSF is 100% TAX FREE.
- Capital Gains Tax (CGT) is only 10% if you hold the property more than 12 months and NIL after age 60 and in retirement.
Because lending to a SMSF has to be done via a “non-recourse loan” where the asset is the only security for the loan, banks are only willing to lend up to 80% on residential property and around 65% for commercial property. Most people are not aware that it is possible to self-finance the loan to the SMSF from equity within their existing home. Because the loan to the SMSF is made at commercial interest rates, this can also assist in reducing your home loan repayment time.
Superannuation is a great tool for building a tax efficient asset portfolio to take into retirement, improving your family’s financial security. Self Managed Superannuation puts you in control of your investments and can offer significant advantages compared to regular managed funds. The ability to invest in direct property using a SMSF is a real bonus for investors who are comfortable with and want to invest in real estate. For full details of SMSF investment rules, visit www.ato.gov.au and look for the super pages. Fusion has fact sheets about Self Managed Super available upon request.
Investing in property through a SMSF can be worth considering:
- If you have good cash flow and combined equity of at least $200,000 in your superannuation and home.
- If you like property as an investment and are in a position to contribute to super above your employer contributions.
Fusion are teaming up with Investment One Property Solutions to run a special seminar on Self Managed Superannuation and Property Investment on Thursday 17th May at 6:30pm at the Crown Plaza Norwest. Visit the event page to register or for more information.