Today there is more and more advertising encouraging people to buy property through super and although this can work as a strategy for many, it can also leave you in a far worse financial position.
Blogger: Dominique Bergel-Grant, founder and director, Leapfrog Financial
So how can you stop yourself failing?
1. Remember the rules of buying property
Property is not about a quick profit. When buying a property you need to think about how it will fit in with your longer-term financial plans and be aware that the property market can both go up and down in value. Factoring in a 7 to 10 year time frame on your investment is important, not only to provide time for growth but also to recover the high costs of entry and exit transactions.
2. Keep the focus on positive gearing
Remember that in superannuation the rate of tax is only 15% that is often well below what your personal marginal tax rate will be. As a result, the benefit of negative gearing in superannuation – where rent earned does not cover your interest and property expenses – is extremely limited. Having a property that is negatively geared will also result in future contributions from your employer being chewed up in bank interest rather than building towards your retirement nest egg.
3. Know your trust rules
Depending upon when you set up your self managed super fund, you may find that your trust deed does not allow you to hold property or borrow to buy a property. Have a read of your trust deed and ensure you do not breach the rules set out, and if you need to make changes to your trust deed, seek qualified legal advice.
4. The liquidity trap
The downside of property ownership is that you cannot just sell off a small portion of a property to fund your retirement living expenses. You also need to be aware that the government dictates how much you must take as a minimum pension from your fund each year. If there is not enough in the way of other investments or income, you will be forced into selling your property to fund the legislated or required pension payments.
5. Have an exit strategy
As you should with any mortgage have a clear exit strategy in place: know how you will fund paying off your debt. Will it be from cash flow over the years reducing the principal or will it be one lump sum? Also be aware that in many cases it may be better to keep your loan interest only, allowing surplus cash flow in your fund to build up other investments, rather than putting the focus on reducing the debt.
These are just some of the key areas you need to consider. Always ensure you get the right advice before buying a property through your super fund. A good financial adviser will not only be able to provide advice but will also be able to project manage the buying process ensuring you suffer from no nasty surprises along the way.
About Dominique Bergel-Grant
Dominique Bergel-Grant is the Founder and Director of Leapfrog Financial and Leapfrog Women & Money.
Since starting her career in financial services in 1999, Dominique has become a highly regarded industry expert in the professional fields of financial planning and mortgage broking.
Dominique is a finalist in the 2013 Female Excellence in Advice Award from the Association of Financial Advisers (AFA) and long standing member of the Mortgage and Finance Association of Australia (MFAA) NSW Mortgage Brokers Forum.
Dominique is focused on helping change the way Australians interact with and think about their money. Her goal is to ensure Australians become more intimate with their money through financial education, giving them the skills to step up and make intentional financial decisions.
She is also often called on by media and invited as a speaker to provide expert advice.