A strong property market has fuelled the growth of a new industry – spruikers encouraging people to set up their own super fund just to invest in property. Our investment watchdog ASIC has warned that these promoters may not be complying with the law.
These days, self-managed super funds (SMSFs) are able to borrow to invest. This has enabled investors to harness two powerful forces – gearing (or borrowing) and the low tax superannuation system, to maximise the benefits of a rental property.
Super funds are able to buy most types of property, albeit with a few restrictions most typically around buying from family members or business associates. However when it comes to selecting a rental property for your super fund, the normal criteria applies. Essentially, you need to be fully comfortable with the quality of the property and the ongoing rent return it will provide to your super fund.
It’s good practice to have an independent person whose opinion you respect, such as a trusted family friend or business associate, look over the property with you prior to purchase – just as you may have done when buying your first home.
If you choose well and pay the right price, a quality property can be a great investment. What worries me is that people may be tempted to set up their own retirement fund just to invest in property. And there are plenty of free seminars being held that are encouraging ordinary Australians to do just that.
This practice has also caught the eye of the Australian Securities and Investments Commission (ASIC). Recently, its commissioner Greg Tanzer spoke about the sharp rise in promoters recommending investors either set up or use an existing SMSF to invest in property, warning that “These promoters may not be complying with the law”.
That’s because anyone providing financial advice must have an Australian financial services licence. For the record, ASIC notes that financial advice includes making recommendations or making a statement of opinion about setting up a SMSF or purchasing property through that fund.
For consumers, the key issue is whether a SMSF is the most appropriate choice for your needs and circumstances. The decision to take responsibility for your own retirement nest egg is not something to be made lightly. And it’s definitely not a decision that should be made in the pressure cooker environment of a seminar pitched at flogging property.
The best person to speak with about setting up a SMSF is your financial adviser or accountant. I recommend working out if a DIY fund is right for you, and then considering whether borrowing to buy an investment property will help you meet your long term goals. There are plenty of other asset classes that could be more appropriate for your needs.
Take a look at my book ‘Control your own super fund’ for more information on what’s involved in setting up and running a SMSF.