(03) 9020 2905Investors, gather round. Come, let me explain the financial history we are about to witness. It’s an exciting first-time event in superannuation.
There will be winners. Bucketloads of them. Some serious coin is going to be made. And if you’re correctly positioned and play things smart, you can be in on “the killing”.
But, mark my words, there will also be no shortage of casualties. There will be tears shed for lost fortunes. Some people will stuff it up. Royally. They will punt big and burn up like a rocket on a bad re-entry. They will lose their shirts. And the cash to buy clothes in retirement.
This unique event hinges on only one thing. That the recent numbers are correct and property is in an upswing.
What’s special this time in property? This will be the first time self-managed super funds will be able to participate, en masse, in a rising property market … while loaded up with borrowed cash (thanks to rule changes in late 2007).
Cheap borrowed cash. The stars, they are aligning.
For SMSF trustees who get this right, retirement could look a whole lot brighter. Holding quality geared investments in rising markets is a wondrous thing.
But the problem – and the crux of all the shrill warnings from authorities in recent months – is that there are vultures waiting to lure in and pick off inexperienced SMSF trustees.
You want eight rules of potentially participating in this opportunity? These will help separate the winners from the losers, or at least lessen your downside risks.
One: If you don’t own property outside of super, don’t buy inside your SMSF. Direct residential property is a more complex investment, because it requires management. But the laws relating to SMSFs, property ownership and gearing are strict and unforgiving. Simply, your SMSF is not a lab experiment.
Two: Crap property will always be crap property, inside a SMSF or outside. What determines rubbish property? Every expert, including myself, will have a different answer. But, from an investment perspective, non-metropolitan properties and high rises top the list.
Three: Be very wary of all “box and dice” solutions. If you go to a seminar (mostly run by developers) that offers to sell you a property, the SMSF loan, set up your SMSF instruments for free and throws in an overseas holiday … are you getting a good deal? Probably not. And just because it’s “free” doesn’t mean you’re not paying for it. You are, through the inflated price you’re paying for the property itself.
Four: Property investment’s golden rule is “land appreciates, buildings depreciate”. Houses and townhouses have land. Flats and units do not. If you want a property to outperform long term, buy something with land attached, close to a state capital.
Five: A negatively geared investment is an investment that is losing money. For many people, and many situations, that can be desirable for short- and medium-term investment horizons. But tax deductions in super are at 15 per cent, versus up to 46.5 per cent in your own name.
Six: Love me long time. Warren Buffett only buys stuff he intends to hold forever. Property investment needs similar timeframes. Stamp duty costs 5 per cent to purchase and there’s another 3-4 per cent to sell out (advertising and agent’s fees). Property investment needs a minimum of 10 years. And SMSFs, if they sell in pension phase, can be sold capital gains tax free.
Seven: Get professional help from financial advisers and mortgage brokers. A SMSF loan has to be structured correctly, from the start. SMSF gearing rules are highly complex and mistakes are very easy to make. And there is only a small, though growing, list of lenders in the space.
Eight: You make your money when you buy. Overpaying for property is death.
This is not a game that too many can participate in. And only few of those who could participate really should.
But the next few years will be exciting times for those SMSF trustees who invest well in this area.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a further four books on investment property, a licensed financial adviser and mortgage broker. bruce@debtman.com.au.