Investors' love of property can lead them into the hands of unscrupulous real estate promoters. But now that those with their own superannuation funds can borrow to invest in property, the dangers are greater. There's been a surge online of "experts" who promise to show just how easy it is to hold property in super, pay next to no tax and receive guaranteed rental income. The sales spiel goes: "All you have to do is relax and watch the value of the property increase ... But to access these opportunities you have to start your own super fund."
Among these property promoters are those not licensed to give advice on self-managed superannuation funds (SMSFs), let alone qualified to make recommendations to borrow and invest in real estate. The property sale is everything. Properties promoted on the internet are likely to have over-inflated prices. After all, the kickbacks that flow between the promoters, property developers and real estate agents have to be paid by someone. Paying too much for property could lead to the investor having negative equity - where the investor owes more on the property than it is worth.
The Australian Securities and Investments Commission needs to get ahead of the curve on this one. We have seen too many instances where the regulator has come in too late, after the money is lost. It appears the regulator is being proactive. Promoters are being investigated, including those that are not licensed to give advice. The regulator is worried more generally about the marketing of SMSFs to investors that should not have them, and has a taskforce looking into a range of matters to do with SMSFs.
SMSFs are probably only suitable for a minority of the population. At least $200,000 in super savings is needed to make the costs worthwhile. Large funds usually provide discounted life and disability insurance with automatic acceptance. If you set up an SMSF you will have to buy insurance as an individual. Those who should be holding real estate in their SMSFs are likely to be a minority of those with SMSFs.
The real-estate strategy is best suited to younger trustees on higher incomes with secure jobs who already have substantial assets in their funds. In the pension phase, a certain minimum percentage of the fund's assets has to be drawn. Unless there are a lot of other assets in the fund, the property will have to be sold to be able to meet the minimum draw downs. Most of the tax breaks on holding property in super are on the capital gains when the property is sold. There would need to be a fair amount of time, at least a decade, for the property to increase in value sufficiently to more than make up for the significant costs of buying, holding and selling property.
Independent advice from those who are properly qualified should be sought. They will take into account all of your circumstances before making recommendations.