Geared property in super: is it for you?

In late 2007, gearing into property via a self-managed superannuation fund (SMSF) became a possibility and with Australia’s collective love of property ownership, it’s an investment strategy that has steadily increased in popularity. According to the most recent ATO quarterly statistics, we have collectively invested in more than $21 billion of residential property within SMSFs, and have limited recourse borrowing arrangements in place for around $9.5 billion.

So how can you determine whether property ion super is the right strategy for you? While the only sure way to determine its suitability is to obtain personal professional advice, there are a few broad guidelines to take into account. Bruce Brammall is director of Bruce Brammall Financial and the author of Debt Man Walking and Property Investing For Dummies. He shared his views with Canstar.

“However you look at it, direct residential property is a favourite of Australian investors,” he says. “I’m certainly a paid-up, card-carrying fan of property investment and I think gearing is an important part of the property investment process. That doesn’t mean, though, that it’s an appropriate strategy for all SMSF trustees.”

Gearing into property could be for you if:

• You have a significant enough amount of available funds in your SMSF to both facilitate the property purchase and comfortably meet any going expenses.
• You are financially literate and have borrowed for investment before, preferably borrowed for property investment before.
• You have sufficient years before retirement to offset both the high upfront costs and to pay down the investment loan.
•  You are a business owner and wish to purchase a business premises to rent back to yourself (via an arms’ length transaction and at commercial rates).
• You understand the duties of a SMSF trustee – in particular the investment implications of the sole purpose test.

“In addition to the above, you need to ensure that your SMSF trust deed allows you to gear inside super,” says Bruce. “The super gearing legislation came into effect on 24 September, 2007, and was amended in July 2010, so if your trust fund was drawn up during 2007 or earlier, there’s a good chance that the deed will not allow you to gear inside super.”

Bruce advises that if your trust deed doesn’t currently allow gearing, you will need to update the deed. “This, on its own, can be a complicated process,” he says. “It’s best handled by a SMSF lawyer, for a relatively small cost of perhaps $700 to $2000.”

Geared property within a SMSF may not be for you if:

• Your SMSF fund balance is less that at least $200,000.
• You are not a sophisticated investor and are not wanting to actively manage a superannuation fund.
• You are within 10 – 15 years of retirement.
• You are wanting the property for personal use between now and retirement.
• You don’t clearly understand your duties as a SMSF trustee.

“SMSF property gearing is not like buying a regular investment property – there are similarities, but the rules are very, very different,” observes Bruce. “The asset has to be held through specific purpose trusts, which are not cheap to set up and there are dozens of traps for the uninitiated just in the SMSF side of the equation. There can be significant consequences for getting it wrong.”

Bruce believes that if investors have never geared into property outside the superannuation environment, they shouldn’t start within it. “Directly held residential property investment is a complex enough strategy. It’s not like owning shares, where the management is taken on by someone else,” he says. “It takes a few years for newcomers to get used to property investment and comfortable with the ups and downs of property management, cash flow issues, interest rates, costs and the tax implications, to name only the major areas.”

For those comfortable with regular, personal-name property gearing, the allure of recreating geared property returns inside super has to be appealing. But I think that property investing inside a SMSF, particularly where gearing is involved, should start with a solid understanding of property investment outside of super.”

Read about the pros and cons of setting up a SMSF.