Tax and legal advice
Justin Beeton

6 biggest mistake SMSF property investors make: part 2

By Justin Beeton

Buying property through an SMSF can be a rewarding investment strategy, but you’ll need to navigate these common mistakes in order to avoid rendering your fund non-compliant and landing yourself in hot water. 

Blogger: Justin Beeton, founder and managing director, The SMSF Club 

In my previous blog, I detailed three key mistakes investors make when using their SMSF to buy property. Here I reveal three more errors they make - and how you can avoid them. 

4. Insurance issues
Not having the property correctly insured is another mistake. You should ensure you have replacement insurance for fire damage to the property, so it can be replaced. In addition, you must have public liability insurance in case a tenant or a tenant’s guest suffers an accident leading to significant injuries resulting in large damages action.

If this were to occur without proper insurance then not only would your SMSF lose the property but all the other assets of your super fund would be at risk as well. This could have horrendous implications for the members’ retirement plans.

In addition, each member should consider life insurance cover to pay off the debt on the property so the surviving member has the option to retain the property upon the death of their spouse in a typical ‘husband and wife’ SMSF.

However, this option will only be possible if the insurance premiums paid from the SMSF are being correctly accounted for and paid from the correct member account balance or a reserve account of the SMSF.

5. Legal oversights
Having an enduring power of attorney in place for each SMSF member is crucial and an area in which some investors fall down if they don’t use an experienced solicitor to set up their SMSF.

Under the superannuation laws, every member of an SMSF must also be a trustee of the fund or a director of the corporate trustee of the fund. If you have lost mental capacity, you cannot be a trustee or director and as such, your SMSF would become a non-complying fund.

Your options in this situation are to either pay out the account balance of the member who has lost capacity, or wind up the fund. Again, if the property was only recently purchased, there will most likely be a loss in these circumstances.

6. Insufficient diversification
Investors should avoid having all of their SMSF’s assets in just one leveraged investment property or having only one asset class (such as property) comprising virtually all of the fund’s assets. A trustee is required by the superannuation laws to prepare an investment strategy and then invest according to that strategy.

A fundamental principle of investment theory and portfolio construction theory is asset diversification. In other words ‘Do not put all your eggs in one basket’.

This is one area that the regulators will be looking at in any review of an SMSF and its compliance with the law.

If you, as the trustee of your SMSF, are not familiar with how to put in place a proper investment strategy, then professional advice should be obtained in this area.

Another reason for diversification is for liquidity purposes. Assets such as shares can be sold immediately, whereas property can take some months to sell. There may be instances where cash is required urgently by your SMSF, so by investing in a range of assets including very liquid assets such as shares, cash can be available at short notice.

Avoiding costly mistakes
There are a number of mistakes that many people make when purchasing property through their SMSF. It is a complex area requiring advice from properly qualified professionals. The laws surrounding SMSFs are also multifaceted, so your regular conveyancing solicitor may not be up to date with all the legal requirements of the superannuation laws.

In addition, advice should also be sought from properly qualified advisers on how to mitigate your insurance risks.

Buying property through your SMSF is a great investment opportunity but you must do it properly, remaining compliant with all the laws – especially where borrowings are used.

Read 6 biggest mistake SMSF property investors make: part 1 here

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About the Blogger

Justin Beeton

Justin Beeton

Justin Beeton is the founder and managing director of The SMSF Club and the head of investments at Sequoia Asset Management.

The SMSF Club is a membership program designed specifically for anyone who has or wants an SMSF. With an extensive network throughout Australia, The SMSF Club integrates a tailored ongoing education program with ongoing administrative, compliance, and investment support. The SMSF Club assists members throughout every stage of the SMSF process. 

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podcast

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  string(72) "Mortgages in a tighter lending economy and why Brisbane is a good option"
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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune in to this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

Son is able to write all types of residential and commercial property loans.<\/p>\r\n

In this episode of Property Showcase, head of mortgages at Rethink investing Son Pham joins host Tim Neary to unpack how an investor should approach getting a mortgage in place with banks tightening down on serviceability.<\/p>\r\n

Hear from\u00a0Son\u00a0about:\u00a0<\/p>\r\n

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  • The pitfalls that he has seen people get into<\/li>\r\n
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    Whether it\u2019s building a successful property portfolio or investing in one of their Development Funds, Open Corp can help you through every stage of your investment journey. The team has 40 property specialists who collectively have been involved in over $4 billion worth of property transactions and the acquisition of more than 8000 homes and investment properties.<\/p>\r\n

    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

    In this episode, hear from\u00a0Michael\u00a0about:\u00a0<\/p>\r\n

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Mortgages in a tighter lending economy and why Brisbane is a good option
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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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A property investment plan years in the making
object(stdClass)#1184 (52) {
  ["id"]=>
  string(5) "18287"
  ["title"]=>
  string(75) "Regional Victoria showing up Melbourne in price performance, new data finds"
  ["alias"]=>
  string(74) "regional-victoria-showing-up-melbourne-in-price-performance-new-data-finds"
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  string(139) "

Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds

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