Investing in property is a popular option in Australia. In some cases, a Self-Managed Superannuation Fund (SMSF) can borrow funds in order to purchase assets it doesn't currently have the cash to purchase outright. In other cases, the SMSF has sufficient funds to buy a property.
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Key factors that have influenced our clients to invest in property over other investment options include:
- Having a bad experience with the share market, many now prefer "bricks and mortar" investments
- Some have built a strong property portfolio and expect these investments to achieve strong capital growth and/or deliver good rental yield
- The volatility of the property market is more manageable than that of shares and managed investments.
While these examples might not necessarily be based on sound investment strategies, it is nonetheless the reality of why business owners and individuals may choose property. We have seen great returns on commercial and residential property investments, but property can't be touted as the be-all and end-all of a sound investment strategy. We've also seen people losing money on such properties.
Before investing in a large illiquid asset like real estate it is critical to consider your current and future SMSF cash flow needs. If an SMSF doesn't or won't in the future have sufficient cash to pay pensions or pay annual operating costs and property expenses including loan repayments, this type of investment would not be prudent.
The initial upfront costs with large property are also high when you consider legal costs, stamp duty, possible lending costs and ongoing interest costs if borrowing to buy. Comparing this to a portfolio of shares, even if under advice, the share portfolio usually has a lower entry cost.
Another factor to consider is lack of diversification, risk driven by holding the majority of your wealth in one significant asset. If the property value decreases due to a downturn which we have seen occur in the last 12 months in many Australian cities or is vacant at length, a more diverse portfolio or even cash may have been performing better. Many factors must be managed to ensure no superannuation legislation is breached. It cannot be stressed enough the importance of obtaining advice before entering into any transactions.