Avoiding disaster in your SMSF

Let’s assume you haven’t been hiding under a rock and you know about using your self-managed super fund (SMSF) to invest in property. I’ve even seen it advertised on the side of buses. It appears to be the flavour of the month – a guaranteed way to win in the retirement saving race. Or is it? What can go wrong? Property is always a good investment, isn’t it?

Before we start, I’m not getting into the property-versus-shares debate that seems to go on between financial planners and real estate agents. The most successful investors I have met don’t have this argument because they have both. It’s called diversification!

So what problems have I seen?

An unscrupulous financial planner was in business with an equally unscrupulous mortgage broker. The client was refinancing a home loan and other debt. The mortgage broker noticed that another $70,000 was available to take the client to the 80 per cent loan-to-value ratio (LVR). The financial planner produced a detailed Statement of Advice (SoA) explaining the SMSF borrowing strategy. The SoA stated that the client’s super balances were too small to afford this strategy, BUT “If you were able to make a contribution of, say, $70,000, you could proceed”.

It was a “miraculous coincidence” the contribution he used as an example was exactly how much equity the client could utilise. Yeah, right!

I also know of situations where people have received phone calls to attend a property seminar. By the end of the day, the spruiker has taken them to his friendly lawyer who has established an SMSF that has signed a contract to buy an off-the-plan apartment.

It’s safe to say these people were put under pressure and didn’t get the best price on the apartment. The next most common issue I see is the lack of an exit strategy. I’ve met quite a few people in their late 50s, even early 60s, who have heard about turning the employer contribution into bricks and mortar and want someone to help set it up.

My question is always, “How does this strategy fit in with your retirement plans?”. Sadly, that is where the blank stare response features too prominently. The only consideration seems to be “property is good”.

If you own the property by the time you retire, capital growth below your expectations will not send you broke because you will have a rental income stream. If you do this five years before you retire, with no hope of paying the loan off, you really are making yourself a forced seller at retirement – with some pretty significant set-up costs to recover.

If the property market is poor, then you’re working longer – simple as that. If there is an overall theme in the poor decision-making around borrowing in super, I would sum it up as an attitude of “it’s not my money”. It seems easy to spend money you thought you couldn’t touch, and really attractive to turn those mystifying statements that get a cursory glance into your own real estate investment. This often leads to the abandonment of due diligence.

Successful property investors can tell you how to select a property better than I can (I legally can’t), how to negotiate the right price, pick the right location and how to have an effective exit strategy. All these rules apply to funding a property purchase through superannuation, too.

Your retirement is important. If you don’t remember that, the regulator may succumb to some of the pressure from industry press to tighten this up.

The above is to be considered as general education. This is not advice and it is not to be acted upon without advice from a qualified professional who understands your personal circumstances.