What are the downsides to buying property through SMSF vs just shares in normal super fund?

of course you have to buy in the right area/timing. if SMSF or not.

 

The 11% and 7.5% i am referring to is CG. Which made me realise I left income out of the shares comparison. But even if include that, because of leverage, the investment in property wins by a long way. Because of the fact that you are getting CG plus yield on 500k not 100k.
So lets say using my figures above, you get 11%CG on the shares plus 5% yield. So you make 16k on the 100k thats still half what you will get on the property at 7.5%CGs (possibly conservative) and 5% yield in my example. (and that is a real example that is not some high, yield, low growth property, thats a house on Melbourne outskirts).

 

Predicting growth is a guess at best.

 

Buying residential property in a capital city in Australia is a pretty well educated guess.
Just like buying a diversified portfolio you can see what something like that has done over the last 30 years just like you can see what residential property has done over the last 30 years.
7 1/2% per annum capital growth is pretty conservative for residential property in Australia.
I don't see property as any more risky and the share market if you buy an a location and that location doesn't boom for a while eventually it will and it's a bit like timing the share market you can buy into the share market is certain point and it might not do much for quite a while.

 

I agree with Paul’s points.

Plus my personal thoughts - Managed Shares inside super is so much easier then tenants, PM’s, laws, maintenance. I guess I personally don’t feel it’s worth the hassle. I really like property and I like the flexibility of it outside of super. I’m terrible with buying and selling shares so I appreciate having an avenue like super to invest in shares.

 

I think that's a reason most people don't do an smsf because it's a lot of work but I'm interested to get some commentary on the numbers because the discrepancy in terms of capital growth between compounding shares and leveraged compounding property is quite large. When you retire you want to have a large asset base that you can then turn cgt free into cash flow.
I'm not trying to convince you to do this I'm trying to understand whether or not I've got the numbers right here because based on my calculations one can make so much more money out of using leverage in super

 

Over the last 30 years RIP in Aus has had an average of 5% CG. You can buy companies with leverage, high leverage if you want, though I dont think buying at over 50% leverage is sound. Leverage is just DEBT which can feed on it self and grow. Share price is not an indicator of investment performance just sentiment at a particular moment. You should look at enterprise value of a company which accounts for leverage if that is your key metric, though there are a whole bunch of other metrics that I think are more useful such as revenue growth. Unless you some how manage to buy a company for the value of its working capital you will most likely have some leverage.

 

I just want to put it out there that setting up and managing SMSF is quite easy. It’s just the initial boring paperwork and super boring yearly compliance checklist (though it should take only 5 minutes to 2 hours for most). Big industry funds managers/ government and VCs don’t want you to take control of your own money (so they can get cheap loans from your super funds), so they promote this false narrative that SMSF is difficult/ complex/ time consuming etc. They spend millions on strategically placed advertisements written as news articles about the complexities of SMSF.
I think buying properties in SMSF is a great idea with 10-20 years investment horizon.

 

Not something I have thought about but this makes perfect sense, happens in some many areas

 

I don’t love residential property enough to squeeze out every dollar to invest in it. But if you do, go for it IMO

 

Of course they do. It competes. Its a massive pool of funds. And growing in value. Many funds now offer alternatives to assist investors to stay put eg direct shares.
SMSFs have some unique features

• Allow multiple members to pool where no other fund allows this. Each member is distinct in all other super.
• Allows both pension and accumulation at same times and this can be altered at whim. Other fund have a pension fund IR an accumulation fund. You can have two accounts but two funds.
• Direct property
• Indirect property eg ungeared unit trusts, public unit trusts etc
• Resi + Commercial property
• Concessions to move commerical property to a fund without duty sometimes
• Limited recourse borrowing usually for direct property and with up to 80% LVR
• Can make sound commerial loans to non-related parties for high returns eg 20%+ if they manage the risks.

SMSFs also have some unique risks. Its not uncommon that a smsf either outperforms or underperforms compared to other funds. This can reflect lack of diversification or even concentrated risk with great returns. The worst performers are those where the members geared up and maximise borrowings in super. Because they could. They then bought cheap property the small fund could afford, not what was a good investment. Often because they applied the false logic of negative gearing to super and assumed all property is good. SMSFs should generally avoid neg gearing. The tax savings make no sense over time. Tax rate of just 15% isnt compelling. It makes sense for positive income. And growth.

 

Ok but what are people buying that has good capital growth and is positively geared?
Are you talking about commercial?

You can sell down a high capital growth asset and pay no capital gains if you sell after you are retired. But well before then it would have become neutral or positively geared anyway.

Buy a house for say 700 grand and it rents for 500 over time it doesn't take long before that rent is covering the mortgage but you get that capital growth.

It seems to me there's a case for buying low yield high growth assets in self-managed super but I really don't know much about this whole thing so....

 

According to the RBA at 7 1/2% return on average over the last 30 years

 

No. There are loads of properties to consider. And why just Australia ? I am always surprised to see few invest outside this country. OK finance makes it exceptionally difficultbut some funds dont need to borrow. BUT I see many SMSFs that produce excellent yields from foreign property. eg 20% +

The aim of super is to maximise returns in a low tax rate environment over time using compounding as a key benefit. Choosing to buy at a low yield of 3% and with poor growth doesnt make sense when there are other choices. Not all countries allow foreign buyers but many do. And its often cheaper than here if there is no duty or low taxes etc. Spoke to someone a few weeks back who owns three holidays lets in italy who is also looking at Croatia. Each costs $80k-$100K Average yields over 15% pa