Mercia | Taxation, Business & Finance Advisers

Thinking of Investing in Property Using a SMSF? Be Careful who you Trust

It seems everywhere you look at the moment there are people and businesses proclaiming the benefits of investing in property using a Self Managed Super Fund (SMSF). SMSFs have definitely grown in popularity with property investors, especially since regulations changed in late 2007 allowing funds to borrow money to invest.

This change essentially created a massive pool of money that many property developers and marketers want a piece of. With many companies claiming they can help investors set up a SMSF and manage the entire purchase process, it’s important that investors stay vigilant and put their trust in the right people.

The main trap is assuming that a company promoting the benefits of investing in property via a SMSF is qualified to offer property investment advice, which isn’t the case. While SMSFs are a financial product and heavily regulated, property investment advice isn’t. This means that just about anyone can advise you on where and what to buy without worrying about the consequences.

The risks that come with obtaining inadequate advice are significant, especially when the advice involves a SMSF. As with any form of property investment, there are obvious risks, such as paying too much or acquiring a poor performing asset. But there are other risks such as choosing a type of property that isn’t right for your long term retirement plan. Given the strict nature of SMSFs, it becomes even more important to make the right investment decision as it may be very difficult to correct the problem later on.

Who should investors rely on to guide them through the process of investing in property via a SMSF? Many investors are confused.

A problem in the SMSF space is the ‘promoters’ who take advantage of ill-informed investors. With the natural complexity that comes with investing via a SMSF, it’s easy to see how investors could be vulnerable to unscrupulous operators who have a financial interest in leading investors to a particular type of property.

Property promoters can be very persuasive and it’s clear why they would target people with a SMSF or those looking to set one up. The problem lies in the fact that these promoters will often have either direct or indirect links to a developer who is looking to sell property new or off the plan. On the surface, this property may seem to stack up as a good investment but the reality is that it often turns out to be dud.

In their haste to get a slice of the SMSF pie, some property promoters haven’t fully understood the many regulations governing SMSF investment, especially when borrowing is involved. This can lead to all sorts of problems for the investor. The trustee of a SMSF has various obligations under the law and if the fund is structured or managed incorrectly, problems may arise that can’t corrected without unwinding the fund and selling the asset. There can even be penalties for the trustee.

Another major risk for investors with a SMSF is that their “advisor” hasn’t bothered to understand the investor’s broader financial circumstances and long term goals, making it impossible to determine whether or not the investment decision makes sense.

While property is a long term asset, this isn’t an excuse to be careless with investment decisions, hoping that everything will work out over time. The long term nature of property investment means there is a significant need to make the right decisions as they will likely impact directly on your retirement years when your financial position is more restricted. Property investing with a SMSF is not a get-rich-quick scheme. It takes careful planning, dedication and requires a detailed understanding of the asset in question.

Property investing with or without a SMSF is a significant step and it’s important to get the right advice from the right people. Investors should seek appropriate specialist financial and legal advice to set up a SMSF, then a property investment expert to help identify and secure the right type of property. A finance broker should be employed to assist with obtaining finance and ideally a property manager would take the responsibility for the management of the property.

Investors should also be aware that investing via a SMSF can be quite complex and take longer than it would buying property outside of a fund. So it’s important to get reliable, independent advice before making an offer on a property. And this advice must be consistent with your plan for retirement. Your property advisor should understand your financial obligations and what you want to achieve in retirement before discussing what types of investments can provide for that goal.

Confidence in WA is Rising Along with the Median Price

People’s fears about the economy are fading quickly and being replaced with an increased sense of optimism, as the property market continues to rise.

Consumer confidence has bounced back in Western Australia, according to the latest Curtin Business School-Chamber of Commerce and Industry (CCI) survey.

The survey confirms what many people already suspected, that people’s fears about the economy are fading quickly and being replaced with an increased sense of optimism. In fact, Western Australians are now more optimistic than they have been for nearly two years.

Survey results show that the proportion of households expecting economic conditions to improve in the next three months had effectively doubled since the last survey. Furthermore, the number of households that think economic conditions will get worse has plunged to a record low of 8%.

CCI chief economist John Nicolaou said households were feeling more confident about their finances after almost two years of consolidation through increased savings and paying down debt.

This is a very good sign for the housing market, which is already seing upward movement. According to the Real Estate Institute of Western Australia (REIWA), the median price in Perth hit $500,000 in the December quarter, higher than originally reported and 6.4% higher than the previous year.

Based on preliminary figures for the first 3 months of 2013, REIWA expect the median price will hit at least $510,000 in the March quarter, which was the previous record high from early in 2010.

The rental market also continues to see growth. In the three months to February, REIWA figures show metropolitan rents increased by 4.4%, lifting the overall median from $450 to $470 per week, which is $60 more than the same time last year.

Property Acquisitions: Working with a Buyer’s Agent – Part 2

Last month we discussed the first step in working with a buyer’s agent, which focused on goal setting and the gathering of requirements. With a personalised plan in place, the next step concerns the property search.

This stage involves the buyer’s agent sourcing suitable investment properties through both on-market and off-market channels, focusing on the areas recommended in the first stage. A good buyer’s agent has a detailed understanding of what’s happening in different areas that could potentially impact on property values and will exploit this knowledge for the benefit of the investor.

The buyer’s agent will scan the market for suitable properties, making initial enquiries with real estate agents and visiting home opens, in order to find properties that both meet the criteria and are competitively priced. Buyer’s agents are property experts who keep up to date with price movements and so they can recognise when a property is competitively priced.

Most buyer’s agents will have established relationships with sales agents who will inform them about properties before they are launched to the market.

Depending on the type of property being sourced, a buyer’s agent may also attempt to identify property that may be purchased off market (i.e. not listed with a real estate agent). These off-market properties are purchased directly from vendors and can often be acquired at an excellent price as the seller isn’t paying a sales commission.

After some preliminary research, the buyer’s agent will form a short-list of suitable properties and present the investor with a key summary about each property. This summary will include an appraisal of the property using comparable sales data to determine its market value. The buyer’s agent may also provide information uncovered during initial investigations such as why the seller has decided to sell and the history of the property.

The investor will then review the information and select which of the properties are of interest. Some investors may choose to inspect the property before an offer is placed, others will leave everything to the buyer’s agent. The investor isn’t obligated to proceed and can instruct the buyer’s agent to continue with the search should no property be of interest.

Once there is a property of interest, the buyer’s agent will meet with the investor to discuss a ceiling price for the property and devise an optimum negotiation strategy that will ensure the property is acquired at the best possible price. Representing the best interests of the investor, the buyer’s agent will also look to secure the most favourable terms and conditions.

Next month we’ll explain what happens when an offer is placed on a property.

Does Splitting a Loan Provide the Best of Both Worlds?

One of the major decisions a borrower will have to make is whether to go for a variable rate loan or a loan with a fixed interest rate. But why choose one when you can have both?

There are many different loans available to property buyers, each with different features and advantages, which can make choosing a loan a difficult process. One of the major decisions a borrower will have to make is whether to go for a variable rate loan or a loan with a fixed interest rate. But why choose one when you can have both?

There are many borrowers who are opting to split their loans into two accounts, one on a variable rate and one on a fixed rate. Loans can be split in many ways dependent on the needs of the borrower, such as 60% variable and 40% fixed, but 50/50 splits are most common.

The reason for splitting a loan is to provide the security of a fixed rate home loan with the added flexibility of a variable rate loan. It’s a form of hedging that may be useful in times of economic uncertainty, particularly when interest rates are rising. Someone with a split loan will be less impacted by rate rises as it will only affect a portion of their loan. However, by maintaining a portion of the loan with a variable rate means the borrower still benefits from rate reductions.

Another benefit of a split loan over, say, a 100% fixed loan, is that the borrower still has the flexibility of a variable loan, such as the ability to make additional repayments and redraw (on the variable part). These features aren’t typically available on a fixed loan but can be very useful as the circumstances of the borrower change.

So what are the disadvantages of a split loan? The nature of a split loan means that the borrower, though protected partly from rate increases, doesn’t benefit fully from a rate reduction. This can prove quite costly if rates drop significantly during the term of the fixed portion of the loan.

Also, splitting a loan may incur twice the fees for setting up, managing and later discharging the loan, which borrowers should consider. Clearly, there are a few things to consider when deciding whether to split or not.

As everyone’s situation is different and loans have many subtle differences, the advice of a professional, qualified finance broker should always be sought before making any borrowing decisions.

Property Management: Drugs and Tenants are a Worrying Mix

There have been a number of cases across the country involving drugs or drug labs being found in rental properties, which might have caused investors some concern.

Late last year in Adelaide, a tenant got in trouble with police after the photos used in a real estate ad showed cannabis being grown in two pot plants in the backyard of the house. One would have to assume that the property manager failed to either notice or identify the plants before placing the ad.

There was also a particularly worrying case in Melbourne more recently where the real estate agents themselves were charged with a number of drug-related offences after 25 rental properties they managed were allegedly used to grow hydroponic marijuana.

If you think it should be easy to spot a ‘drug house’, think again. In some cases the properties containing drug labs were actually found to be excellently maintained and even the gardens were in good shape.

One of the questions investors may be asking is regarding insurance. Are you covered by landlord’s insurance if your tenant is found to be illegally producing drugs in your property? It’s a bit of a grey area and something a policy holder should discuss directly with their provider.

But the issue isn’t necessarily to do with “damage” to a property. The clean-up costs involved in dismantling a drug lab can be significant even when there is technically no damage done to the property. Some polices may cover these costs, others won’t.

One thing is certain, that investors should take care when choosing a property management company. In particular, they should make sure the company has a thorough, rigid process for vetting prospective tenants and a policy of conducting regular inspections.

When it comes to the property management companies promoting ridiculously low fees, you have to question how many shortcuts they are taking when it comes to the tenant selection process or the management of your property.

Suburb Snapshot: Belmont

Belmont is located just 7 kilometres east of Perth’s central business district on the southern bank of the Swan River and part of the City of Belmont. It neighbours the suburb of Ascot to the north, Redcliffe to the east, Cloverdale to the south, and Rivervale to the west.

While some associate the suburb with its considerable industrial and commercial district, mainly concentrated in the western part of the suburb, Belmont is also a popular place to live especially in the eastern and northern parts of the suburb.

The suburb’s north-western boundary is Great Eastern Highway, a major road that passes Perth Airport and is home to various motels and other accommodation.

Belmont has two public schools, Belmont Primary School and Belmont City College (formerly Belmont Senior High School), as well as a number of parks and recreational areas, including the popular Centenary Park and Signal Hill Bushland.

Residents of Belmont have a variety of retail options including Belmont Forum, a major shopping complex located in neighbouring Cloverdale, which also includes a cinema and entertainment facilities.

The median house price in Belmont is around $480k but this figure masks the wide range of housing options and price points available in the suburb. There are villas for sale from $350k to 450K, older houses on big blocks from $450k to $550k, townhouses in the mid to high $500k’s, modern homes from $600k to $900k and development sites anywhere from $550k to $900k depending on size and location.

The suburb has a relatively high proportion of renters, with 44% of properties currently being rented, and the median rent is an affordable $300 per week.

In terms of capital growth, Belmont has performed excellently both over the short term and the long term, consistently outperforming the wider Perth market. The growth rate over the past 12 months was an impressive 10.2%, which is in line with the 10 year average of 10.7% per annum.

Belmont has been transforming rapidly since the City of Belmont’s Local Planning Scheme No 15 was gazetted on 1 December 2011. The Scheme and associated Housing Strategy gave parts of the suburb higher zoning to encourage increased housing density and provide opportunities for developers. In fact, the Scheme more than doubles the density target set at State level in Directions 2031 and Beyond.

Also helping to transform Belmont is a major infrastructure project to upgrade Great Eastern Highway between Kooyong Road and Tonkin Highway, which covers the entire north-west border of Belmont. The $30 million project, jointly funded by the State and Federal Governments, will see a 4.2 km section of the highway upgraded to six lanes with a central median, on-road cycling facilities and a continuous pedestrian path. It will also involve upgrades to all major intersections and the introduction of bus priority lanes.

The project, which commenced in late June 2011 and has just been completed, should help to improve safety and connectivity for motorists, pedestrians and cyclists, reduce travel times, and increase the attractiveness of public transport services. It will also enhance the look of the area with new facilities and modern urban design.

Belmont will also benefit, at least in part, from Gateway WA, the largest infrastructure project ever undertaken by Main Roads WA. The $1 billion national priority project aims to improve the safety, attractiveness and efficiency of the main transport areas around the airport and the freight and industrial hubs of Kewdale and Forrestfield. The Gateway WA project incorporates road and bridge improvements, facilities and connections for pedestrians and cyclists, noise walls, landscaping and more.

For many investors, Belmont has been a hotspot for quite a while. With its strategic location between the city and the airport, a forward thinking council and various major projects enhancing the area, it should remain a strong investment option for some time more.

Source: REIWA.com.au, March 2013