Property investments can have pitfalls

Accountants HLB Mann Judd Sydney have expressed concerns about property spruikers targeting self-managed super fund (SMSF) trustees.

Michael Hutton, HLB Mann Judd Sydney's head of wealth management, says trustees should be careful when they are introduced to property investments through spruikers or those running seminars.

"It is easy to get carried away with the attractiveness of properties presented in this way but they are rarely bargains and carry additional charges such as sales commissions built into the buying price," he says.

"Unfortunately, we are starting to see a rise in such property spruikers who are promising fantastic returns on property for SMSF investors."

Usually, it requires investors to take on a big debt to fund the purchase, which may not be such a good strategy, especially for those in retirement or close to retirement.

Hutton says residential property investors are usually seeking a good capital gain when they sell to make the investment worthwhile. And that usually takes time, which may not always be on retirees' side. For those seeking income for retirement, there can be better yields from other investments.

Then there are the demands on landlords. While trustees can appoint an agent to manage their property that does not obviate the need to make decisions about the property. There are also potential pitfalls in having super savings tied up in one asset.

"Property is usually an illiquid asset, which should be a key consideration for retirees who generally require good cashflow," Hutton said.

"For example, if retirees need a significant amount of cash, for instance, to make pension payments, having to sell a property to realise this cash is not an ideal outcome."

It can take several weeks, if not months, to sell property, and a forced sale may mean selling at a timewhen the market is weak.

Property investors need to factor into their budgets the cost of repairs and maintenance and there could be times when there is no tenant in the property.

Hutton says an SMSF must be wound up upon the death of the last member of the SMSF and paid as a lump sum to beneficiaries or the estate. Even if the family wants to keep a property by transferring it out of the SMSF, stamp duty will be triggered.

He says one of the situations where holding property in an SMSF can be beneficial is for business owners where their business real property is held in the fund. He says while it can make sense for younger SMSF members to hold a business premises in a fund, it may not be sensible for a 75-year-old to be invested in real estate through their SMSF, particularly if it is geared.

"Holding property in an SMSF has to make sense from investment, tax and income perspectives, not simply because people think property is the hot asset class of the moment.

"Often, geared property investments are extremely tax effective even when held by an individual."

Going through the extra hurdles, and cost, of satisfying the super fund borrowing restrictions may not be worthwhile compared with holding the property personally, Hutton says.

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