Why Invest in Property?

The Rationale for Property Investment

Every SMSF in Australia is legally required to have a robust investment strategy, and the ATO (Australian Taxation Office) keeps a close eye on compliance. If you're feeling a bit unsure about developing one, seeking expert advice from a professional financial adviser is highly recommended. They can help tailor a strategy that aligns perfectly with your goals.

Your investment strategy is essentially your roadmap, outlining the decisions you, as an SMSF trustee, will make to achieve your members' financial objectives for retirement. This includes determining which assets to buy and sell. Property is one of the major asset classes your SMSF can consider, alongside shares, bonds, and cash.

There's no one-size-fits-all answer to "why invest in property?" It truly depends on your unique SMSF and the financial goals of its members at any given time. However, we can discuss general considerations for incorporating property into your investment strategy.

Long-Term Stability of Rental Return and Resale Value

All asset classes dance to the tune of volatility, influenced by market conditions and the perceived value of the asset over time. Volatility is basically how much an asset's income (returns) and its resale value jump around. It's often linked with "risk" – generally, higher potential risk is associated with higher potential returns.

SMSF investment strategies typically aim to progressively shift towards less risky assets as members get closer to retirement. By the time you're ready to start drawing down your pension, most members are looking to minimise risk and preserve capital.

Let's quickly compare risk/return profiles across asset classes:

• Cash: Super stable value but very low returns. Highly liquid (easy to access) but a poor long-term growth investment for an SMSF in accumulation phase. However, for retired members, cash can be ideal for capital preservation.

• Bonds: Can offer higher returns than cash, with minimal default risk for most government bonds. Some might lack liquidity, meaning you might need to hold them until maturity. An SMSF solely invested in bonds might struggle to achieve desired retirement returns.

• Shares: Generally involve higher risk but offer the potential for higher returns. The vast variety means careful selection and diversification are crucial. For example, investing in a video rental chain's shares might have become worthless with the rise of streaming, highlighting business-specific risk. Many SMSFs mitigate individual stock risk by opting for diversified Exchange Traded Funds (ETFs).

• Residential Property: With careful selection of location and condition, residential property can generate stable rental income that often appreciates with property values. While property values can fluctuate, the rate of change is generally less volatile than shares. Unlike a niche business that can become obsolete, people will always need housing, making it a fundamental commodity.

• Commercial Property: Similar to residential, owning commercial premises (e.g., the building that housed a former video store, rather than the business itself) offers fantastic diversification from the underlying business. If one tenant leaves, another business is likely to rent the space, reducing exposure to the fortunes of a single industry.

In summary, property can provide a stable, long-term income stream that is potentially less volatile than other asset classes. This can be exceptionally well-suited for SMSFs in their accumulation phase and even early pension phase when fund liabilities are more predictable.

Why Use an SMSF Loan?

(Limited Recourse Borrowing Arrangements - LRBA)

For most SMSFs, using a loan is the most practical way to acquire property, given the significant purchase price relative to typical fund sizes. However, SMSF trustees must be acutely aware of the strict rules and risks associated with borrowing (financial leverage) and its potential impact on the fund's asset diversification, liquidity, and overall risk profile. These loans are specifically called Limited Recourse Borrowing Arrangements (LRBAs).

Therefore, a thorough assessment of your SMSF's capacity to manage an SMSF loan is absolutely crucial. This should ideally be done with the combined assistance of Enhanced Coastal, the lender, and your financial adviser. The positive aspect is that as the loan is repaid over time, the risk decreases, aligning well with an SMSF's investment strategy as members approach retirement.

Enhanced Coastal strongly recommends that you obtain professional advice from your Tax Agent or Financial Adviser before considering this loan option. This is complex, specialist lending, and it's essential you understand all the implications.

When you are ready, Enhanced Coastal will provide the expert guidance towards obtaining funding for your SMSF property investments.

We are ready when you are!