Investors ask: SMSFs, property and retirement
I am less than 10 years from retirement and would like to build up the assets in my self-managed super fund (SMSF). I have a stable job, but only about $250,000 in my SMSF. Is investing in property through my SMSF too risky given how close I am to retirement?
A very good question.
With your $250,000 capital in your self-managed super fund (SMSF), you may be able to leverage to purchase property/properties up to $1 million. Under the current regulations, banks may lend a maximum of 80 per cent of the property’s value. Hence, the $250,000 may be utilised as a 20 per cent deposit and around five per cent expected incidental costs to purchase properties up to $1 million.
Your SMSF still needs to meet the serviceability requirement and requires the right structure with the corporate trustee, corporate custodian entity and the custodian trust before the leverage is sought.
Your question whether ten years is a safe investment period is a valid one. One may argue that property cycles run between seven to ten years and prices are expected to appreciate significantly during this period. I believe an important consideration is the location of your prospective purchase. Depending on where you purchase, you may be at the beginning or perhaps close to the pick of the market. You also need to consider diversification as properties are not liquid assets. Your investment strategy must be documented.
The benefits of SMSF leverage to purchase properties include the concessional tax rate of 15 per cent for revenue profit and 10 per cent (if held for over twelve months) of capital gains tax. After retirement, under the current regulations, the superfund becomes tax free. Further benefits include asset protection, control over your investment asset and benefit of leverage and compounding.
Hence, my view is ten years to retirement perhaps is not too late, provided that the appropriate structures are established to achieve the appropriate leverage and the suitable properties are purchased in strategic locations.
I wish you the very best with your investment journey and planned retirement.
Munzurul Khan, principal, Keshab Chartered Accountant