How SMSFs should invest in property

The latest statistics from the Australian Taxation Office on SMSFs make for interesting reading. In its March 2014 SMSF statistical report, the ATO shows the number of SMSF members has topped the one million mark for the first time, at 1,006,975. Although the growth is slowing, the trend of people taking direct responsibility for their retirement income remains on an upward trajectory.

In the same report, the growing appeal of residential property as an asset class was also highlighted; it increased 17.2 per cent to $20.5 billion in the 12 months to 31 March 2014. For the doomsayers, those numbers were proof positive that a one million-strong army of SMSF members investing in residential property with their ears pinned back was a disaster waiting to happen.

Well, perhaps not. Let’s give this a little context. At $20.5 billion, it comprises only 3.7 per cent of total SMSF assets of $558.5 billion. Of total SMSF investment in property, it is non-residential (predominantly commercial) property that makes up 77 per cent of total property investment, at $68.4 billion. Borrowings, too, remain negligible at $2.8 billion or 0.5 per cent of all SMSF assets.

When I see these numbers I draw a completely different conclusion. Quite clearly, a growing number of SMSF members want to invest in residential property. They probably know that historically it’s been a sound investment. In Victoria, and based on Real Estate Institute of Victoria (REIV) figures, the annual growth has been 9.5 per cent gross over the past 48 years. According to these numbers, the median house price in 1966 was $9,400; in 2013, it was $569,000. Over that period, the market retreated year-on-year only eight times.

That suggests to me that SMSFs investing in residential property is a sound decision – with certain provisos.

In a nutshell, the key decision is to get the right professional advice. With property, this involves two steps: First, it’s essential that a residential property fits the SMSF’s overall investment strategy. It has to be part of a diversified portfolio that could include shares (Australian and overseas), cash, bonds, even collectables. Based on the ATO’s figures, the vast majority of trustees are doing just this – only 3.5 per cent of all SMSFs have an asset allocation where a residential property exceeds 50 per cent of their portfolio.

The other part of the advice equation is ensuring you are getting the right advice on the actual investment property. If the point of introduction from any property adviser is how you can use an SMSF structure to leverage into the property market then you are most likely talking to the wrong adviser.

What the right adviser will be asking you is, 'Have you selected the property on its merits after doing your due diligence?' The big advantage offered a property investor (as distinct from someone buying a house to live in) is that there is no need to rush the acquisition; even in strong markets there are always good buying opportunities.

In particular, there are two key factors to consider. Investors should look for a property with low maintenance requirements. The tax advantages of a SMSF investing in property are minimal and the laws governing SMSFs do not allow extensive renovations that change the characteristics of the property.

It’s also critical to ensure the property will generate a strong yield (4 per cent plus), especially if you have to service a debt. This does not mean you ignore its growth aspects, the main factor deciding the success of a property investment; it’s just that yield is more important when bought by an SMSF.

The reality is that Australians like property investment. It’s why our home ownership is one of the highest in the world, and why one in seven Australians own an investment property. SMSF members are no different from the rest of the population; residential property will appeal as an investment. This is why it’s critical that they get the right professional advice and the spruikers are kept firmly at bay.

About Bill Nikolouzakis

Bill Nikolouzakis is the founding director of Nyko Property. With over 12 years’ experience in both property marketing and banking, Bill knows what it takes to make property investment and development ventures successful. Bill holds a full Estate Agents Licence, in addition to several financial services and management accreditations. He is a seasoned investor with a banking background, positioning him ideally to assess each project from a holistic standpoint. Bill’s unique skill set allows him to swiftly identify properties with the best opportunity to perform as investment vehicles.

Bill manages daily operations at Nyko Property whilst mentoring administration staff and key account managers.