Superannuation has come a long way since the mid-80's when it was generally limited to public servants and the employees of large corporations.
In fact, it wasn’t until 1992 – with the introduction of the Superannuation Guarantee – when a percentage of earnings over and above wages had to be paid into super by employers…starting at a paltry three per cent contribution rate!
So today we’re privileged to be able to take advantage of the unique opportunities opened up by the introduction of self-managed super funds (SMSFs).
But not as many Australians as you would expect have taken the step of utilising this valuable investment tool. In fact, while almost three quarters of Australia’s population has a superannuation fund, in June 2021 less than five per cent of Australian’s had an SMSF. Why is this?
WHAT TYPE OF PEOPLE HAVE SMSF'S?
As a starting point, it should come as no surprise that the median age for all SMSF members is 60, and that almost 70 per cent of SMSFs have two members, usually an older married couple.
However, Australian Taxation Office (ATO) statistics also reveal that those aged between 35 and 54 have been the most active in terms of recently establishing new SMSFs. Importantly, the most common trait this group shares is possessing the motivation to choose and manage their own investments.
Motivation, choice and self-empowerment. Powerful traits to own and emulate.
AS WITH RISK AND REWARD, WITH GREAT POWER COMES GREAT RESPONSIBILITY
The main difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees. This means that while the members of the SMSF run it for their own ultimate benefit, they are also responsible for complying with superannuation and tax laws. Quite the responsibility when you think about it!
However – as with the types of personalities drawn to running their own super – the sheer size of the funds themselves also punch well above their weight! The nearly 600,000 SMSFs in Australia – comprised of a total of 1.1 million members – collectively hold a very healthy $822 billion in assets, accounting for around 25 per cent of the $3.3 trillion invested in superannuation!
And there is no reason that – with the right advice – you can’t be a part of this growing, motivated and empowered group!
USING AN SMSF TO PURCHASE INVESTMENT PROPERTY
The key advantage to setting up an SMSF means that you can decide for yourself where your super is invested, as opposed to a generic fund manager making important investment decisions on your behalf. And if you’re passionate about property, you can choose investment property as part of your strategy.
At this point it’s important to note that you can’t purchase a property to be lived in or rented by yourself, any other trustee or anyone related to the trustees. It is not a holiday home or a cheap rental for you and your relatives; it’s an asset that should appreciate in value and be able to generate income for your retirement.
And that is precisely why setting up an SMSF is a highly regulated process, and why restrictions on borrowing through an SMSF are quite strict.
Your very first step should see you seeking professional financial advice to fully understand the responsibilities and to ensure the fund is set up correctly. Mario Vinaccia, of Veale Accounting Group, elaborates:Some other considerations that should be considered with the help of a financial advisor include:
Leaving a “liquidity buffer” in the SMSF. This should be worth around ten per cent of the proposed investment’s value and ensures you have funds available to pay for ongoing expenses such as maintenance and repairs.If you are borrowing, the loan-to-value ratio (LVR) is also generally higher for an SMSF, so you may need a deposit of between 20 and 40 per cent.Finally, interest rates can also be a little higher as it is considered a commercial investment.
These conditions may change in the future, and aren’t necessarily a bad thing as they are simply the cost of doing business and growing your property portfolio. Remember, at the end of the day lenders (not to mention your mentors and advisors) just want to make sure you purchase the right property to ensure your overall investment success. This is also a key reason that your team of advisors should be made up of professionals with particular expertise in investment property.
WHAT DOES THIS LOOK LIKE IN REAL LIFE?As you can see, this isn’t just a strategy for the minority of Australians, but something that can be achieved by anyone who surrounds themselves with the right team. You just need to start by seeking expert advice, not only on what properties you should purchase, but also with regard to setting up the SMSF itself and whether it’s appropriate for your situation.
Contact The Property Mentors so we can help you to efficiently build your expert team, grow your property portfolio and learn more about SMSF opportunities.
