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Thinking of investing in property using an SMSF? Be careful who you trust

Wednesday, 3rd Apr 2013
Categories: Finance, Newsletter

older investors

It seems everywhere you look at the moment there are people and businesses proclaiming the benefits of investing in property using a Self Managed Super Fund (SMSF). SMSFs have definitely grown in popularity with property investors, especially since regulations changed in late 2007 allowing funds to borrow money to invest.

This change essentially created a massive pool of money that many property developers and marketers want a piece of. With many companies claiming they can help investors set up a SMSF and manage the entire purchase process, it’s important that investors stay vigilant and put their trust in the right people.

The main trap is assuming that a company promoting the benefits of investing in property via a SMSF is qualified to offer property investment advice, which isn’t the case. While SMSFs are a financial product and heavily regulated, property investment advice isn’t.  This means that just about anyone can advise you on where and what to buy without worrying about the consequences.

The risks that come with obtaining inadequate advice are significant, especially when the advice involves a SMSF. As with any form of property investment, there are obvious risks, such as paying too much or acquiring a poor performing asset. But there are other risks such as choosing a type of property that isn’t right for your long term retirement plan. Given the strict nature of SMSFs, it becomes even more important to make the right investment decision as it may be very difficult to correct the problem later on.

Who should investors rely on to guide them through the process of investing in property via a SMSF? Many investors are confused.

A problem in the SMSF space is the ‘promoters’ who take advantage of ill-informed investors. With the natural complexity that comes with investing via a SMSF, it’s easy to see how investors could be vulnerable to unscrupulous operators who have a financial interest in leading investors to a particular type of property.

Property promoters can be very persuasive and it’s clear why they would target people with a SMSF or those looking to set one up. The problem lies in the fact that these promoters will often have either direct or indirect links to a developer who is looking to sell property new or off the plan. On the surface, this property may seem to stack up as a good investment but the reality is that it often turns out to be dud.

In their haste to get a slice of the SMSF pie, some property promoters haven’t fully understood the many regulations governing SMSF investment, especially when borrowing is involved. This can lead to all sorts of problems for the investor. The trustee of a SMSF has various obligations under the law and if the fund is structured or managed incorrectly, problems may arise that can’t corrected without unwinding the fund and selling the asset. There can even be penalties for the trustee.

Another major risk for investors with a SMSF is that their “advisor” hasn’t bothered to understand the investor’s broader financial circumstances and long term goals, making it impossible to determine whether or not the investment decision makes sense.

While property is a long term asset, this isn’t an excuse to be careless with investment decisions, hoping that everything will work out over time. The long term nature of property investment means there is a significant need to make the right decisions as they will likely impact directly on your retirement years when your financial position is more restricted. Property investing with a SMSF is not a get-rich-quick scheme. It takes careful planning, dedication and requires a detailed understanding of the asset in question.

Property investing with or without a SMSF is a significant step and it’s important to get the right advice from the right people. Investors should seek appropriate specialist financial and legal advice to set up a SMSF, then a property investment expert to help identify and secure the right type of property. A finance broker should be employed to assist with obtaining finance and ideally a property manager would take the responsibility for the management of the property.

Investors should also be aware that investing via a SMSF can be quite complex and take longer than it would buying property outside of a fund. So it’s important to get reliable, independent advice before making an offer on a property. And this advice must be consistent with your plan for retirement. Your property advisor should understand your financial obligations and what you want to achieve in retirement before discussing what types of investments can provide for that goal.