Average to awful experiences with property investing - to invest SMSF in property or not?

Hi

My husband and I have had some interesting experiences investing in property in the past five years. Some average, some awful, some really good. All learning experiences.

What's the consensus on using a SMSF to invest in property? I have to admit I haven't searched other threads for this yet, I wanted to get an introduction post on here before I forget.

We've got a SMSF set up but we're conscious that making a bad investment decision could cause long term damage to our retirement fund - we're already having to dig ourselves out of a mining town related hole that will take years to recover from, we don't want to jeopardise our super too.

Would a property with two income streams lower the risk? Should we stick with our corporate superannuation fund and leave it to the experts?

Cheers

Emma

 

Hi Emma,

Ultimately the decision would be up to you as the SMSF directors.

If it helps.... there is a postcode restriction list when it comes to SMSF property loans. The banks simply won't lend to a SMSF in certain postcodes... and in some they will but with a lesser LVR. So their rules help indicate to you that you're looking in an unstable area.

Generally they'll expect minimum deposit of 20% (depends on fund size... you might need 30% deposit for eg if your fund balance is less than $150k) and will expect a certain rental yield, or a bigger deposit in lieu of this.

The large deposits are aimed towards ensuring the rent could cover most or all of the mortgage and bills so as to not rely on superannuation contributions from your employers so much.

 

Hi @Emma Pearce

Welcome to PC.

Leaving in Corporate Super Fund vs buying a property in SMSF will depend on what funds you have in SMSF, and how much you can spend.

I don't think a property with two income streams lowers risk. You need a large cash deposit anyway, so depending on the rental return the property, the property may already be positively geared anyway. In my view, depending on affordability, it would be worth while going with a good quality, well located property - rest will work out fine as super is long term anyway.

If you do decide to go down the SMSF path - do one thing - do not roll over funds until and unless you have received appropriate advice, TPD and Life Insurances in your SMSF.

Good luck!

 

Thanks for the tips. We're covered for insurances because we've still got our corporate super policies (and in fact we recently stopped contributing to our SMSF and put the monthly employer contributions back into the corporate fund, at least until we purchase a property). We've got $200,000 we could use for a property investment deposit. The key is finding a 'good quality, well located property' as you said - we've picked two properties in the past that haven't grown at all in the past five years. We thought we did all the right due diligence but it didn't work out.

 

I am keen to know a bit more about the two properties you mentioned.

Are these in metro areas?

As you would already be aware there are multiple RE cycles in Australia - so perhaps these were purchased in a location that had already grown prior to your purchase, and currently in a stagnant market?

There is also the supply and demand factor. People like to live in convenient locations - close to shops, transport, schools, work etc. Do your properties provide for this? Or are these the mining town ones you referred to earlier?

 

Regional areas, the theory being they were cheaper to purchase but still had the growth drivers and plenty of renters. Cessnock we built a granny flat as well so that does ok but no capital growth. Warrnambool is the other one, a land release put more properties on the market which stunted growth and rent. We have our PPOR in Sydney that has a granny flat rental income and has had capital growth, so we're doing ok because of that.

 

Hi Emma, I cant comment on SMSF because I dont know about it myself.
But I feel now you have learnt to look for land scarcity the hard way.

I don't have a crystal ball but I guess if you choose regional I suppose being near the middle of town is the way to go. Mine are all Metro but my sister has a house in a not good part of Wagga, she experienced minimal capital growth (missed the whole Sydney boom) and it's not easy to sell either.
Wishing you the best for your regional properties. xx

 

Make sure you get accountant advice before you buy in a SMSF to ensure you get things absolutely correct. Accountant friend audits SMSFs and the penalties are significant if you don't adhere to the strict rules.
Marg

 

Thanks Marg, that's definitely one of the reasons stopping us at the moment, we bought an investment in a trust and it's making a loss so the implications and paperwork are immense. Won't be doing that again without a very good understanding of the requirements and that's one of the reasons why we can't afford to make the wrong property choice - it has to be cashflow neutral at least.

 

Hi Emma

I personally decided to set up a SMSF as I believed I could get a better return by investing it in property myself than leaving it up to others.

I setup my SMSF in 2013 and was able to purchase 2 properties in there and the equity in the properties has grown to a level where now I have been able to double my super value, if I were to sell the properties (excluding selling costs and capital gains tax).

However on paper my property are actually slightly cashflow negative however I can live with that as I can not redraw the income until preservation age. Due to maintenance costs and short vacancy for the last financial year.

My point is if you believe property investing in going to help increase your overall value in your SMSF go ahead with it.

Having said that I personal follow these rules when selecting my properties to invest in:
45 km of major CBD.
no regional or mining towns.
Area where population is growing
Infrastructure is being build
There is employment.
Look for an area on the up cycle of the market. (Although this can never be guaranteed but look for key indicators which can help)

Hope that helps

Happy investing

Ash Oz

 

So @Oz Property Portfolio and others, is this right:
With the "it's sensible to have at least $200k in super to SMSF due to fees" in mind, let's say there is $200k in a SMSF (also @Emma above).
At 80% LVR (@JacM above), and the super fund also paying all the purchase costs, that's potentially:
- 1x $830k property (loan $664k, costs $35k).
or
- 2x $414k properties (loans $331k, costs $17k).

From JacM, they would have to be positively/neutrally geared, which would be pretty hard (almost impossible in today's climate?) for an $830k property but certainly possible for a $414k one.

 

Precisely @mcarthur

If you want the property to be neutrally geared, then you need a certain rental yield which you're more likely to get in a lower priced property than a high priced property. With that said, due to setup costs of a SMSF loan, you don't want to be mucking around buying a $150k property. It's a waste of time and money.

 

Money in the Super Fund is one thing but what sort of income would the SMSF need to service @ loan of 664k in example given?

 

If neutrally geared, then by definition the rental income would cover the interest payments and costs to keep the property. So the SMSF would need no "income". Of course it would be at risk if interest rates rose substantially.
I think the interesting point is whether the bank would lend on a negatively geared property IF the owner of the super fund was still putting regular (say historically continuing PAYE) super payments into the account. ie. say the person was on $100,000 p.a. income, and having $9,500 (9.5%) super p.a. If the property was negatively geared at $180pw ($9500 p.a.) would the bank agree to the loan? How about $100pw ($5200 p.a.)? @JacM ?

On my calculations, $180pw post-tax loss on a buy of $830k would indicate a yield of about 3.3%. It's certainly not hard to imagine many properties at $830k with that sort of yield, so it's a reasonable scenario.

 

Maybe to buy this one you should spend your time and effort finding the right buyers agent rather that property selection..

 

Option to not spend all of the cash and purchase something around the $500k range. Cashflow burden (if any) will be lower.

Then put the rest in say an index fund or term deposit.

Some lower risk diversification.
Will also help pass the 10% net equity test with the lenders too by having liquid assets..

 

I am not a broker but my understanding is the lenders like to see a minimum rental yield... and in the absence of that they might require a larger deposit.

 

SMSF lenders will pull you up on this as the ones I've come across want a minimum 1.5x interest income service ratio (ie. 1.5x the income to service 1x the interest of the asset).

This is why low balance funds struggle to get funding for low cost, low income assets, because that income also needs to cover the fund expenses at the end of each quarter and end of year.

For my mind, resi investing in a SMSF is just not viable unless you aren't borrowing, or you have spectacular casflow (NRAS comes to mind hey @euro73 ). That, and the fact you cant strip out equity to fund future purchases so you have to sell down and repurchase, putting unrecoverable funds down the drain.


pinkboy

 

Hi Emma,
Hubby & considered a SMSF for property but then decided against it. We looked at the average gain of our Super and it was over 10% year on year - can't remember exactly off the top of my head but solid gains. It just made sense to leave it for the time being. It's just another way to diversify our investing. It has taught us to keep a closer eye on our Super rather than forget about it. We actually read the Super statement when it arrives now!

 

10%?! My industry fund is -3% for aggressive and about 2.5% for non-aggressive .