Are you thinking of buying a property in your Super Fund?
There’s no doubt that some investors have done very well buying an investment property in their Self Managed Super Fund (SMSF).
But there are some serious concerns about this type of investment with other investors losing out, in part due to a whole new group of promoters and spruikers (many of them unlicensed) and this has caused Consumer Affairs to issue warnings.
The SMH reports that advisers recommending self-managed super funds are being bombarded by property developers with offers of up to 20 per cent commissions, top-up bonuses and other special cash incentives to encourage the super investors to buy off-the-plan apartments and has produced this interesting infographic to illustrate how these schemes fail:
ASIC reviews have also found that borrowing to buy property in superannuation is often associated with poor financial advice, yet it’s one of the nation’s fastest growing investment products.
The Sydney Morning Herald reports Ben Kingsley, chief executive of the Property Investment Professionals of Australia, a body attempting to monitor and control excessive borrowing, commissions and unethical practices (and of which Metropole is a foundation member), as saying:
“The industry has no control …It’s imperative for the prospective buyer to work out whose best interests are being served by them buying a property for their superannuation.”
Self-managed super funds (SMSFs), whose borrowings and derivative concessions were created to allow instalment warrants, account for about one-third of the nation’s $1.8 trillion of super savings.
During the past 20 years they have evolved from sophisticated investment structures for the rich into mainstream vehicles advertised on railway and bus stop hoardings.
Best-guess estimates are that the use of leverage in superannuation funds is “embryonic but growing”, according to the Financial System Inquiry, which last week published an interim review of issues facing the nation’s financial system.
Look how things have changed:
During the four years to 2012 the proportion of SMSFs with borrowings tripled to about 4 per cent, according to the Australian Taxation Office.
The average amount of borrowings during this period also tripled from about $120,000 to more than $350,000. Total borrowings were more than $6 billion.
Additional research, by Investment Trends, found that in the 12 months to April 2014, the number of funds using gearing, or borrowing, increased by about 11 per cent to 38,000, making it one of the nation’s fastest growing financial products.
Most of the research is based on annual tax returns, which means it is about 18 months out of date, a big gap during a strong property market when sales in the nation’s capitals have been strong.
Some groups, such as the SMSF Professionals’ Association, an industry group promoting best practice, say that the $18.6 billion invested in residential property is less than 1 per cent of the $4.7 trillion Australian residential housing market and poses no systemic, or inflationary, dangers.
So who do you ask for advice?
The SMH claims that relaxation of gearing rules for super about three years ago, allowing property investment through the funds, has been a windfall for many financial advisers who have been able to offset the loss of commissions on investment products with generous five-figure commissions from real estate agents for recommending clients use limited-recourse borrowing to buy property – typically off-the-plan apartments.
Advisers are also being offered “no course, no examination, 100 per cent success rate” real estate qualifications that enable them to tap into the big commissions from investors wanting to plunge into property markets.
Under the new regime, the financial adviser can take a fee as an adviser and a commission as a real estate agent. Now that’s a worry.
Non-bank lenders, including low-documentation providers, are also cashing in as investors maximise negative gearing tax breaks with high-loan-to-value, interest-only loans.
Loan-to-value ratios are falling and there has been claims that some buyers may soon be using credit cards to help pay house deposits as credit and borrowing requirements ease, according to experts.
By the way…The recent Murray enquiry suggested that SMSF’s not be allowed to borrow money to buy properties in the future. This recommendation is currently being reviewed – another reason to get expert advice.
So what should you do?
Firstly educate yourself and then seek independent advice from appropriately qualified professionals – not sales people
To help educate yourself we’ve created a series of 6 blogs with videos provided by Westpac to get you up to speed about the tricks and traps of property investment in a SMSF