Lachlan MacPhee and Simon Gladysz believe the key to managing a property in their self-managed superannuation fund (SMSF) will be ensuring cash flow during good times and bad.
The couple invested more than $500,000 in a popular inner-suburban Melbourne townhouse, which currently constitutes about 75 per cent of their SMSF’s multi-asset strategy.
They expect the comparatively high exposure to property to lower as they build their fund’s equity and bond holdings through regular contributions.
“This is a long-term investment,” says MacPhee, a project manager. “We hear about volatility in the market but we are planning a long-term strategy so that chatter does not overly concern us.”
The property market is slowing after seven years of growth because of slowly rising rates, falling values, concerns about over-supply and rising costs.
The couple learned about volatile property markets the hard way, having bought a one-bedroom off-the-plan apartment eight years ago that has failed to increase in value.
“We learned not to invest in off-the-plan because the high volume of apartments being built means competition is intense for sellers,” MacPhee says.
Change in lending
Big lenders, such as Westpac Group, which is the nation’s second largest mortgage lender, have quit making new loans to SMSF property investors.
There are concerns that some SMSF investors could face tough decisions after buying properties that are hard to rent, have expensive ongoing costs and/or require renovations.
Spending on properties within the fund is limited by mandatory contribution caps, which means that in the worst case investors might be forced to cut losses and sell their property in a falling market.
MacPhee, who used a buyer’s agent to help select the property, says maximising rental returns and lowering costs are key criteria. That includes locking in a rental return that will continue to comfortably cover costs as interest rates begin to rise from record lows.
The nation’s year-on-year average capital city rental returns are about 0.5 per cent for houses and 0.9 per cent for apartments, which compares to the headline inflation rate of 2 per cent and is lower than banks’ dismal savings rates.
Performance is mixed, with rentals falling in Sydney and Perth but rising by about 13 per cent for houses in Canberra and 8 per cent in Hobart.
Cate Bakos, a buyer’s agent, says property buyers need to be as confident as they can of likely rental returns for the foreseeable future by seeking expert appraisal rather than rely on developers’ inflated guarantees or agents’ recommended rents.
MacPhee chose a five-year-old townhouse, rather than a high-rise apartment, in the expectation there will be lower ongoing costs and expenses compared to strata titles and body corporates.
A rule of thumb for owners’ corporation fees for a standard 50- to 60-square-metre, one-bedroom apartment in a complex without luxury communal facilities is about $2500 a year. That rises to about $6000 a year for a luxury apartment.
Factor in fees
Corporation and maintenance fees can double at the end of the first year. Owners also have to allow for thousands of dollars a year in council rates and water levies.
The cost of five-star resort facilities – such as a concierge, Olympic-size swimming pool and rooftop terraces – are not usually disclosed in owners’ corporation contracts, according to Sahil Bhasin, national general manager of Roscon Group, an owners’ corporation consultancy.
“Buyers who underestimate the costs involved in running the loan or property in the fund, maintaining the property and the implications of any interest rate rises can find themselves in trouble,” says Bakos who has four investment properties in her SMSF.
Property investors should ask their adviser to estimate cash flows based on a realistic appraisal of likely rents, existing owners’ corporation fees and estimates of any special levies, she says.
They should also plan for a “rainy day” fund to cover unforeseen problems and possible breaks in rental income, such as a vacant period between tenants.
Scott Hay-Bartlem, SMSF specialist adviser and partner for Cooper Grace Ward, recommends investors review their funds to ensure they are maximizing contributions and, if necessary, lowering costs.
“Investors need to be careful and make sure they can fund their investment, particularly if there is a period when they are not receiving rental income,” he adds.
His other recommendations include:
- Make non-concessional contributions –up to $100,000 each per year or, using the three-year bring forward rule, up to $300,000 each at once.
- If facing financial stress, an option is to sell down other assets in their SMSF. Many SMSFs might have significant other assets, particularly where it holds a business premises. It’s worth seeking advice as to which assets to sell.
- Find any stray superannuation in retail funds and roll it to the SMSF.
- Make concessional contributions up to the cap of $25,000 per year each, either from a business or salary.
- For those over 65 who have sold a dwelling or business asset, investigate contributing via the downsizer or small business capital gains tax rules. There are several conditions, for example the home must have been owed for 10 years.
- Add adult children as members of the fund. An SMSF can have up to four members. Terms and conditions of the fund will need to amended to reflect the changing ownership. Children’s superannuation can be rolled over to the SMSF, and further contributions made to the SMSF using the caps for the children. The children must become trustees or directors of the trustee company, which potentially exposes them to liability for any issues in the SMSF and complicates death benefit planning.