Low interest rates are giving many investors an added incentive to look at investing in property – either directly or through their SMSF. We look at some of the things you should look out for before you sign on that dotted line.
Australians have always had a love affair with property. But that affair could be about to get even steamier as historically-low interest rates reignite people’s appetite for borrowing.
Here are some of the dos and don’ts of property investing:
Do – Define your goals
A ‘successful’ property investment depends on your goals. For example, are you looking for a high level of rental income? Or are you more interested in long-term capital gains? A clear strategy of what you are hoping to achieve can help you decide where to look, and what types of properties suit you best.
Don’t – Over-borrow
When interest rates are low it’s easy to fall into the trap of over-borrowing. But property is generally a long-term investment, and it’s likely you will experience a range of interest rate scenarios over time – something your budget needs to cater for.
Do – Reassess your insurances
Increasing your level of debt is a good reason to reassess your life insurances. This particularly applies to death and total and permanent disability (TPD) cover, as one of the main goals of these insurances is to extinguish debt if you can no longer service it.
Do – Diversify
If you already own a home, putting of all your resources into property could leave you more exposed to a downturn in the property market. Make sure you discuss your diversification strategy with your financial adviser before you invest.
Don’t – Invest for tax reasons alone
The lure of tax deductions can be a distraction when you’re investing in property. But don’t get too caught up in the tax savings to realise how much you’re actually spending on things like stamp duty, legal costs, renovations etc. It may take many years of capital growth to recover those costs.
Do – Talk to your financial adviser
While property can be an important part of a diversified investment portfolio, you need to be careful about how you go about it. Ongoing advice from your financial adviser is essential to ensuring your property investment meets your long-term goals.
Since the rules allowing borrowing inside an SMSF were introduced in 2007, real property investment in SMSFs has grown to be worth $73.1 billion at or 14.7% of total assets invested SMSF assets of $496 billion . And this trend looks set to continue with low borrowing costs and dwindling returns from cash and fixed income investments.
If you’re considering investing in property in your SMSF, talk to your financial adviser. There are strict rules around the types of properties and lending arrangements that are acceptable.
You also need to consider the SMSF’s ability to meet current and future expenses, and potential liquidity issues that may arise from owning a large asset that could be slow or difficult to sell if you need to cash out a member’s benefit.
1 SMSF statistical report, Australian Taxation Office, March 2013
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