Property Investing - Switzer Report · 2020-05-19 · Propertythe smsf guide to Investing....

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PropertyInvestingthe smsf guide to

contributors

Peter switzer

Paul rickard

james dunn

margaret lomas

jason huljich

tony negline

jo heighwaybarrie dunstan

Peter Switzer is one of Australia’s leading business and financial commentators. He launched his own business, The Switzer Group, 20 years ago, which has since grown into three successful companies spanning media and publishing, financial services and business coaching.

Paul Rickard has more than 25 years experience in financial services and banking, including 20 years with the Commonwealth Bank Group in senior leadership roles. Paul established CommSec in 1995, where he was CEO and Managing Director until 2002 and then Chairman until 2009. He was named Australian ‘Stockbroker of the Year – Hall of Fame’ in 2005.

James Dunn was founding editor of Shares magazine, and former personal investment editor at The Australian. James is also a regular financial commentator on Australian radio and television.

Barrie Dunstan is one of Australia’s most experienced business and investment journalists. He has been an associate editor and columnist with The Australian Financial Review since 1987 and specialises in superannuation and funds management. He also writes on personal investment and has published three books for investors.

Margaret Lomas is a qualified financial and investment property adviser; she is Senior Associate with FINSIA – the Financial Services Institute of Australasia – and is the host of two weekly property investment shows on Sky News Business Channel. She is also a past NSW Business Woman of the Year and Westpac Business Owner of the Year.

Jason Huljich is the CEO of Centuria Property Funds and a Director of the ASX listed Centuria Capital Limited. Jason has been involved in investment property funds in Australia since 1996 and has developed considerable expertise in investment property selection, fund feasibility and funds management. Jason holds a Bachelor of Commerce (Commercial Law).

Tony Negline has worked in financial services for over 20 years and has been heavily involved in Self Managed Super Funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees. For more than seven years he has written the weekly DIY Super column for The Australian newspaper.

Jo Heighway is the founder and CEO of Engage Super Audits. Her online audit firm is one of the largest SMSF audit providers in Australia. Jo has been specialising in SMSF audit and compliance for over 16 years since starting her career in the super audit division of Deloitte. She is widely recognised as one of Australia’s leading SMSF audit experts.

Brought to you by www.switzersuperreport.com.au

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Improving auction clearance rates, record low interest rates and a sense that the property market is coming out of the doldrums are leading many SMSF trustees to think hard about using their super monies to invest in property.

Typically, SMSFs have invested in property indirectly through listed or unlisted property funds, or for those where the trustee owns a business, by buying the trustee’s business premises. Purchases of investment property have represented only a very small proportion of overall SMSF assets. However, a change by the ATO of the interpretation in its treatment of “improvements”, together with improving market sentiment, have led to a strong pick up in investment property enquiries by SMSF trustees.

Using your SMSF to buy an investment property can be a pretty effective strategy. Last year, the ATO confirmed a change in the rules that means that for a property subject to a super loan (‘a limited recourse borrowing arrangement’), other monies inside or outside your super fund can now be used to improve the property. Potentially, you can “buy the worst house in the best street, do it up, and then when you are in pension phase, sell the property free of any capital gains tax (CGT)”.

That’s the strategy – buying, potentially improving, holding, and selling free of any CGT.

Let’s take a quick look at the advantages and disadvantages of buying an investment property in your SMSF.

using your suPer to invest directly in ProPerty

by Paul rickard

SMSFs have the unique capability of being able to buy property in their super fund. It’s not easy but there are plenty of advantages for the astute trustee.

advantages 1. Unlock yoUr sUper money Your super monies cannot be accessed (withdrawn) until you meet a ‘condition’ of release, which for most of us is not until age 60.

However, you can use these monies to buy an investment property in the name of your SMSF. The super monies can be used as the deposit, or to buy the property outright. For keen property investors, using your SMSF is an alternative to buying property with your own money. 2. maximUm capital gains tax rate is 15% Because super funds are taxed at concessional rates, the tax payable on any capital gain will be considerably less inside your superannuation fund than if you own the property outside super. In fact, the following rates will apply:

• If your fund is in accumulation phase and you have owned the property for less than 12 months, capital gains will be taxed at 15%

• If your fund is in accumulation and you have owned the property for more than 12 months, capital gains will be taxed at 10%; and

• If your fund is in pension, capital gains will be taxed at 0% – tax free!

3. income (net rent) is only taxed at maximUm rate of 15%As with all superannuation investments, income is concessionally taxed – 15% in accumulation and 0% on assets supporting pensions. This is great for properties that are purchased outright, and for those that are positively geared.

disadvantages 1. single asset riskProperty is a lumpy asset, and for many funds, the investment property may represent a considerable chunk of their super monies. They may be overly exposed to a single asset class – and perhaps more importantly – a single asset. Other asset classes such as shares may provide better risk-adjusted returns. Like all markets, you need to know what you are doing.

2. transaction costs and liqUidityTransaction costs, such as stamp duty and the agent’s fee when you come to sell the house, are relatively high. You should count on:

• To set up the bare trust for the property (ie. the property custodian), around $2,500

• Loan application fees – some banks are still charging around $1,500 for a residential property application fee, although competition is bringing this down to as low as $500

• Bank legal fees – to review your SMSF trust deed and property custodian deed, typically around $1,500

• A valuation may be required (you pay the valuation fee)

• Most banks will require you to obtain independent financial and/or legal advice – often, this comes at a cost (around $2,000).

3. negative gearing makes no sense As your SMSF only pays tax at a maximum rate of 15%, it is not the most tax efficient vehicle for a negatively geared property. If the sum of interest expenses, rental expenses, repairs and depreciation exceeds the rent, then the effective deduction on the difference is 15% inside super compared to up to 46.5% outside super.


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Australians love residential property, and so do a lot of SMSFs. Residential property offers SMSFs a sound diversification, relatively low volatility compared with other growth asset classes, and historically strong returns – with the caveat that an individual property carries a large degree of idiosyncratic risk.

The flipside to that caveat, however, is that residential property is an inefficient market that, to the expert buyer, offers the equivalent degree of idiosyncratic opportunity.

Here are five things that an SMSF should consider when assessing its property strategy.

1. Use the sUper tax concessions to the fUllSMSFs gain huge advantages from holding a property in the concessional tax environment of superannuation. Once the property is in the super environment, capital gains tax (CGT) and rent are taxed at the super fund rate of 15%, and when the fund moves to pension phase after age 60, where the property is backing the payment of a superannuation pension, the income from the property and capital gain on its eventual sale are tax-free. This means that if you wait until the pension phase before selling the property, you can legally take CGT on the final sale out of the equation.

2. combine the tax concessions with the ability to borrowSMSFs are allowed to borrow to buy property if the recourse for the loan is limited to the asset in question. Under the rules, there is a “single acquirable asset”, meaning that only one property at a time can be bought under each separate borrowing arrangement.

The lender can be a related party: this means that a person can lend money to their super fund to buy a property.

Our love affair with property never seems to end. Here are some tips to consider when looking at this asset class for your DIY super fund.


four tiPs for an smsf ProPerty strategy

by james dunn

If the fund borrows to buy the property, it can claim interest payments as a tax deduction and potentially reduce tax liability. This gives the fund the ability to diversify its investment portfolio through prudent borrowing, while giving significant tax advantages as well.

3. consider government-offered residential property packagesDefence Housing Australia (DHA) and the National Rental Affordability Scheme (NRAS) are federal government schemes that provide several benefits – and mitigate several prominent risks – and are thus worth considering by an SMSF wanting to invest in residential property.

Defence Housing provides housing to members of the Defence Force and their families, and offers investors the opportunity to buy individual dwellings and lease them back to DHA. Investment can be a lease of nine to 12 years or three to six years. Investors have no tenanting or management responsibilities and their rental income is backed by the federal government.

DHA costs a lot more than standard property management, but vacancy risk is virtually nullified. Also, DHA pays for total refurbishment of the property on the exit of a tenant – a cost not normally paid by a tenant.

NRAS is a tax-effective property investment in which investors rent approved houses at 20% below current market rates to eligible tenants, in return for a financial incentive of a minimum of $9,981 tax-free per house annually.

The tax advantages of SMSFs are particularly well-suited to NRAS. Cashflow is usually positive from the outset, out-of-pocket costs are minimal and there is a tax-free grant at the end of each year. The drawback with both of these

ownership structures is that you do not control your property.

4. consider a syndicate to lower yoUr entry costProperty syndicates enable SMSFs to be involved in investments they could not make on their own. Most syndicates set up these days are SMSF-compliant, reflecting the huge demand from SMSFs for property investment. It is common to see syndicators offering a $20 million office building funded by SMSFs (and other investors) putting in anywhere from $50,000–$100,000 each, and enjoying 9%-plus yields for their trouble, with any capital gain on the building a bonus down the track.

An interesting alternative structure is DomaCom’s “fractional ownership” online property platform that is scheduled to be launched in the third quarter of 2013. Using the DomaCom platform, residential and commercial property will be made available by owners and developers, and SMSFs and other long-term investors will be able to buy (and sell) fractional interests in these properties.

DomaCom will also lower the entry cost of property investment.

ProPerty syndicates enable sMsFs to be involved in investMents they could not Make on their own.

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the best bank loans for buying ProPerty through your smsf

by Paul rickard

Comparing super loans (more correctly known as ‘limited recourse borrowing arrangements’) is fraught with danger because the complexity of individual fund arrangements means that the best loan for my fund may not be the best loan for your fund. For example, the availability of an interest offset account is very high on my list of priorities. However, if your fund keeps minimal cash balances or you are more than satisfied with your current deposit account, it won’t be high on your list. So, before getting to the ‘winner’, let’s review the features and the fine print.


Borrowing to invest in property in your SMSF is a tricky business and it’s hard to know which provider to go with. We uncover what you need to look out for in the fine print and show you where to start.

suPer loans: the features & the fine Print1. how mUch can i borrow? Known as the ‘LVR’ or lending valuation ratio, you can typically borrow up to 80% for residential property if your fund has a corporate trustee, and 72% if your fund has individuals as trustees.

2. eligibilitySome banks require all the members to be in the accumulation phase, others look for the SMSF to have a minimum net asset position (excluding the proposed property). You should check any eligibility requirements.

3. servicingCan your SMSF service the interest on the loan? Most banks count 80% of the net rental income from the property and any concessional contributions (up to $25,000). More enlightened banks consider dividend and other investment income in the fund. 4. interest ratesMost banks use the ‘standard home loan rate’ for loans secured by residential property – some use business rates. Check carefully.

5. mortgage insUrance Typically not required, although some of the non-bank lenders require lenders mortgage insurance (LMI) if the LVR is 70% or more.

6. offset accoUnt A couple of banks offer an ‘offset account’ for residential property loans – this can be particularly cost effective for an SMSF that holds cash for liquidity or other purposes. 7. application fees Competition is bringing these down – for residential loans, these range from $1,500 to $350.

8. loan servicing fees Typically, these are around $10 per month for loans secured by residential property.

9. bank legal fees Costs charged by the Bank to review your SMSF trust deed and (potentially) your property custodian deed. These range from $1,500 to $2,150, however they can go much higher. Some banks

provide a ‘panel of solicitors’ and/or offer a template of the custodian deed, which tends to drive these costs down. 10. independent financial advice? Most banks (not all) require the trustees to obtain advice from a qualified financial adviser to confirm that the loan is in keeping with the fund’s objectives and that the trustees understand the risks. If you haven’t got an adviser, this means an extra upfront cost. 11. personal gUaranteesMost banks will require the trustees (as individuals) to provide personal guarantees. If providing a guarantee, you may need to get independent legal advice. 12. the banksThe table below shows the key attributes of super loans secured by residential property from the major lenders – AMP, BOQ, CBA, NAB, St George and Westpac. Other lenders include Bendigo, Liberty Financial, Macquarie, State Custodians and Suncorp.

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There are two things you can’t do when it comes to investment property and SMSFs. Unfortunately, some of the property ‘spruikers’, real estate agents and buyer’s agents don’t understand the rules. These are:

1. You can’t purchase the investment property from a ‘related party’. Under the super rules, this is quite exhaustive – a related party to a member includes any lineal descendent (husband, wife, brother, sister, son, daughter, aunt, uncle, etc.), or a company or trust controlled by the member; and

2. If it is an investment property, you or a related party can’t rent the property from the fund. In 99% of cases, this will cause the fund to breach the ‘5% in-house assets’ test. You will need to find an external tenant.

TWO THINGS YOU CAN’T DO

can a couPle buy an investment ProPerty that their smsf owns (at market Price)?An SMSF can only acquire a limited range of assets from its related parties, which include the fund’s members, their relatives, close business associates and entities any of these control or are deemed to control.

This limited range of assets doesn’t include residential property. Typically, only business real property and listed shares are permitted.

An SMSF can, however, sell any asset to any of its related parties.


13. and the winner is? Competition is really increasing in this market and since we started surveying the banks, there has been considerable improvement in their product offerings. Application fees have been crunched, offset accounts are becoming more common, and LVRs are edging higher. Watch this space – it will change further over the next 12 months.

If you are in the market today for a loan secured by residential property, our vote goes to St George ahead of AMP, and then Bank of Queensland followed by Westpac.

The offset account for us is a critical feature – the ability to save considerable interest expense by using this as your basic deposit account for your SMSF is a big plus. While the quoted standard variable rates of both banks are largely the same (St George 6.49% and AMP 6.50%), St George has lower fixed rates. With a little more experience in the super borrowing market, St George just edges out AMP – for now!

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took delivery of a property in a few years’ time for which they paid a price reflective of ‘yesterday’s’ value. Everybody won – the early buyers made money as soon as they settled and the developer sold the remaining 80% for a profit. a strange new worldThese days, though, developers attempt to sell out the entire development on irreversible contracts, which force a buyer to settle once complete, regardless of the underlying value of the property. In addition, they usually attempt to set a buy price that is indicative of what they think it will be worth once settled, rather than at a discount to the future price. Suddenly the risk is placed completely in the buyer’s court, with no recompense or reward available for taking this risk.

things to watch out for when buying off-the-Plan

by margaret lomas

When the property market heats up, we see an instant increase in the number of off-the-plan properties being offered for sale. With confidence returning to a market, developers seize on the opportunity to ramp up their construction and to make money while the market seems buoyant.

In the old days, off-the-plan was fairly simple. Developers, needing development finance, would offer around 20% of a development to the market at a price which reflected the market price of the day. These ‘pre-sales’ then provided the strength needed in a loan application and gave the lender confidence to advance the development funds. In return for these early sales, on what was essentially a risky product to invest in, buyers taking the risk

Buying off-the-plan used to be simple. A buyer would get a discounted property in order to help the developer find finance. Unfortunately,

these days most of the risk might be with the purchaser.

When you buy a property ‘off-the-plan’, you are entering a contract to purchase a property prior to its completion. The builder or developer produces a building plan, and you are essentially purchasing the intention to construct.

Once the contract is signed, you will pay a deposit, and you are then required to settle on the property once it has obtained its occupancy certificate from the local authority.

When considering any off-the-plan purchase, it is important to fully understand the contract and the obligations placed on both the purchaser and the builder or developer. Some legal firms now specialise in conveyancing services for off-the plan purchases as the complexities are beyond the experience of the average conveyancer.


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what to watch out forBuying an off-the-plan property must be considered to have a higher risk for a number of reasons.

They include:• An inability to be sure that what is

promised will be delivered;• An inability to effectively visualise the

final product;• A reduction in the capacity to buy

at market value – you can’t forecast market value of any area three years beforehand;

• An inability to determine future demand for rentals, and actual future yield;

• An impossibility to determine future demand factors, as well as the potential future supply in that same market;

• The potential for you to reduce your ability to buy more property as you wait for the off-the-plan property to complete – while you are under contract for that property, a lender may be unwilling to advance funds for more property, effectively stalling your property acquisition; and

• Disaster if the final product does not value up to purchase price and your lender only agrees to advance 80%

of valuation – you are left with an unconditional contract to proceed, and if you are unable to raise the difference in cash or equity elsewhere, you may have to default on the contract and lose your deposit. This will be particularly problematic for SMSFs, where equity in other property held in the fund may not be used to raise any difference, and where, if there are not sufficient funds available to meet the shortfall and you have reached your maximum contributions limit for that year, you will run into certain default on your contract.

other risksAdditionally, many off-the-plan contracts include a clause that allows the developer to rescind at any time, for any reason. There have been many purchasers who have bought property off-the-plan and when, some years later and just before settlement when it is actually worth more than they agreed, find that the developer exercises his or her rights to terminate and pulls out of the deal, preferring instead to reap the profits him- or herself. Developers who do this have used the buyers’

promises to buy (which are expressed in their purchase contracts), to raise funds from lenders to proceed with their developments, only to keep the profits and provide no reward to the buyers.

It is incredibly sad to see people caught up in this kind of trap, and off-the-plan purchases are particularly dangerous as you are dealing with the unknown future. It is definitely not an appropriate strategy for someone to undertake if he or she is in a weak financial position to begin with, or if they are using an SMSF with limited assets or available funds. In the past few years we have seen a prevalence of off-the-plan properties completed and being worth well below the purchase price and many purchasers defaulting on their contracts. Developers can, and will, pursue the contracts, forcing the buyers into difficult financial circumstances.

As an owner occupied option, an off-the-plan property may be suitable where the buyer has access to enough funds should their finance fall through or not cover the agreed purchase price. As an investment, though, they are risky and uncertain, and in most cases should be avoided.


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don’t forget ProPerty related tax deductions

If you’re not sure of what you’re entitled to, a quantity surveyor might be able to help out.

If you own residential investment property in your SMSF, there are plenty of legitimate deductions to which you may be entitled, which can be used to reduce your fund’s taxable income.

depreciation and capital worksOne of the deductions most often missed is depreciation and capital works allowances.

If the property was built before 16 September 1987, the owner can claim depreciation on the plant and equipment – the oven, dishwasher, blinds, carpets, etc. – but not the building. The plant and equipment must be depreciated at varying rates subject to the ‘effective life’ of the asset.

If the property was built after 16 September 1987, the capital works allowance comes into play, and the owner can claim depreciation on the actual building – the brickwork, the concrete, etc. – as well as the plant and equipment.

Your total capital works deductions cannot exceed the construction expenditure. If you have bought a rental property off-the-plan, no deduction is available until the construction is complete.

Depreciation and capital works allowances must be claimed over a number of years. You can work out your deduction for the decline in value of a depreciating plant and equipment asset using either the prime cost or diminishing value method. Both methods are based on the effective life of the asset.

The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life. The diminishing value method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.

The Australian Taxation Office (ATO) has a handy guide to the taxation treatment of rental income and expenses (at http://www.ato.gov.au/content/downloads/ind00313554n17290612.pdf) that explains how to calculate both these methods.

These deductions are not as handy to an SMSF as they are to a non-super investor on a higher tax rate, but while your fund is in accumulation mode and taxed at 15% on its earnings, you should ensure that you identify and use every cent of depreciation allowance to which you are entitled. Paying more tax in your SMSF than you legally should pay is a mug’s game. depreciation schedUleEvery owner of an investment property should prepare a depreciation schedule, to make a thorough list of all the things for which they can claim. This schedule should note all of the things that the owner has done to the property, or things that were done to it in prior years. Even if a previous

two ways of working out dePreciation

by james dunn

As a property owner, you are entitled to a range of depreciation and capital works related deductions. But what are they?

owner renovated the property before your fund bought it, your SMSF is still entitled to claim depreciation.

The best thing to do is engage a quantity surveyor to do this job. Not only is the quantity surveyor highly likely to find you extra deductions, if they find that you’ve missed one from prior years, in conjunction with your accountant they can lodge an amended prior-year return as well – up to two years’ back.

A common misconception is that just because you have bought an older house – say, a 1970s house – there is no point getting a depreciation schedule prepared. But there is, because you have paid for the plant and equipment within that property: for example, there is still value attached to that oven, those blinds and those carpets.

The capital works allowance (also known as the building allowance) can be a bit more complicated. On a brand-new house, the capital works allowance is claimable for 40 years from the date of completion.

If your fund builds a house today and it costs $200,000, within that house there might be $20,000 worth of plant and equipment – the ovens, dishwashers, blinds, etc. – that you can depreciate at varying annual rates.

The brickwork and concrete might represent $180,000 – you could claim that at the fixed capital works deduction rate of 2.5%, or $4,500, for 40 years. But if your fund buys an investment property that was built in 1993, you could still have 20 years of deductions left. renovationsUsing a quantity surveyor is particularly important in the case of renovated property: if you do not know the cost of renovations done before your SMSF bought the property, the quantity surveyor is fully qualified to make an estimate that

one oF the deductions Most oFten Missed is dePreciation and caPital works allowances.


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will be acceptable to the ATO.If your SMSF is renovating an investment

property – which under the ATO’s final ruling SMSFR 2012/1, it can do if it is not using borrowed funds for the renovation – there is likely to be residual value, and thus unclaimed depreciation, on any plant and equipment you replace. You may be able to claim immediate deductions for elements of the property you remove: but if you do not know the cost of what you have pulled out, you might not be able to claim for it.

Another reason for using a quantity surveyor is constant changes to what can be defined as plant and equipment, and what is considered necessary in order to make the property available to be rented out.

If your depreciation report calculates your total depreciation in year one as $10,000, the tax benefit to your SMSF is worth 15% or $1,500. Clearly that is not as beneficial as the $4,650 that the same depreciation amount would be worth to a non-super investor on the highest marginal tax rate, but it is $1,500 that stays in your SMSF and does not go to the ATO. You can maximise the benefit by buying property in an area where the rent is relatively high.

The other point to make is that by the time your SMSF is in pension mode and not taxed, there is no point in a depreciation schedule, because you do not need tax deductions. The above was compiled with the assistance of Tyron Hyde, director of quantity surveying firm Washington Brown.


iF you do not know the cost

oF what you have Pulled

out, you Might not be able to

claiM For it

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you are not happy with the manager you have now, get another one – and another one if you are not happy with him or her. It is very easy to cancel a property management agreement, and it is your job to oversee your manager to ensure he or she is doing the best job possible for you.

When choosing a property manager, don’t merely settle for the one attached to the agency from which you purchased the property. Taking care of your new investment requires skill and, as with any job, you must now interview potential candidates so that you can choose the one you feel can best fit the bill.

2. ask the right qUestionsThe issues you should cover before you proceed with any manager include:

• How many properties do you currently manage, and what number of staff do you have to manage them?

• How often are inspections carried out, and what is the cost of these?

• What is the actual percentage that represents the management fee, including all sundries, postage, telephone, leasing costs, advertising, letting fees, linen, laundry, cleaning and maintenance? (Note, this is different in each state.)

• How often are disbursements to the owner made? (While a minimum of monthly is most desirable, especially where you have borrowed to invest and must make regular mortgage repayments, don’t be afraid to ask for fortnightly disbursements.)

• What action does the manager take when a tenant is behind in rent?

• Has the manager had any past cases of complaints from owners?

• What is the vacancy rate across the manager’s rent roll?

• Has the manager experienced any past financial difficulty?

• Has the manager been involved in any failed companies or ventures?

• What strategy would the manager use to seek a tenant if your property experienced vacancy?

• What plans does the manager have to attract tenants to your property?

• What plans are in place for staff to

manage the job when the manager takes annual leave?

• How many tenants on the books are currently in arrears?

• How many cases of serious tenant damage have been experienced in the past?

• What process does the manager use to screen tenants?

You will probably think of more questions you can ask, but the above represents the minimum amount of information you need to make an informed choice.

3. treat it like any other job When you retain a manager for the job of managing your property, the process should be taken seriously and treated in the same way as you would to recruit someone for any job. If, and when, the performance slips, waste no time in putting in place an action plan for the improved performance of the manager, or for his or her replacement in the event that this can fairly easily be achieved.

4. an important thing to noteHaving said all that, even the most thorough of interviews cannot guarantee that you retain the best possible manager. However, there is one more step you can take to ensure that, if you end up retaining a manager whose performance is not what you had hoped, you can swiftly terminate them. This step is to ensure that the notice for termination period in your management agreement is very short.

It’s likely that, when you receive the contract, the period of required notice will be already included, pre-typed in black and white. These periods are normally a minimum of one month but, depending on the state, can be as long as ‘till the end of the current lease’. You certainly don’t want to be stuck with a poorly performing manager that long, so be sure to strike out any pre-written clauses and write in a period that better suits – I suggest two weeks.

A good manager should not be scared off by even a one-day clause and if the manager you are dealing with refuses to accept a shorter termination period, then you should refuse to retain them.

I’m often asked about the best way to choose a tenant. This question assumes that you intend to manage a property yourself and, in my opinion, this is not a good idea.

Part of the process of property investing is to ensure that you have a professional approach – you’ll probably spend many long hours ensuring that you do the research and buy the right kind of property. Once that’s done, trying to save a few tax deductible dollars each week by managing it yourself makes no sense, and it’s definitely a job best left to the professionals. If you value your own time, you’ll know that what you pay to a property manager for the few hours a week they will devote to looking after your property is most likely considerably less than you can earn yourself doing something else! 1. don’t settle for second bestHaving said that, not all property managers are equal and, rather than thinking about how to go about choosing a tenant, you should instead be considering how you should choose a good property manager. Once you have done so, don’t make the mistake of choosing the manager and then forgetting about your property. Be sure to keep a close eye on them so that they continue to do a good job for you.

A property manager must do more than simply act as caretaker for you. If

by margaret lomas

tiPs for finding good tenantsOnce you’ve bought an investment residence, the next thing is to secure good tenants that will stay with you. To do so, you will need to make sure you have the right property manager working for you.


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try a trUstLong-term studies have shown that over 10 years or more, the broad returns from the two major classes of equities – shares and property – have been fairly similar. But they often have different levels of liquidity and dividend paying shares offer the tax benefits of imputation credits.

Unless they have a multi-million dollar fund, it’s unlikely that direct property is automatically suitable for most SMSFs. An investment of $350,000 to $600,000 in a single residential property will for many funds lead to both an over allocation of assets to property, and also material single asset exposure.

commercial opportUnityIn many cases, the more manageable property investments for SMSFs are units in a property trust or syndicate. Investments need to offer reasonable income and liquidity; luckily, there is a range of listed property investments that also give diversification as well as liquidity.

When they do start looking, investors need to put as much emphasis on the investment aspects as the property in the trust or syndicate. For a start, unlisted syndicates usually are closed-end where the money is locked up until the syndicate is wound up. This may entail investors taking a leap in the dark – that the properties are sound, that income won’t ebb away or that the syndicate is not carrying too much debt.

Unlisted trusts are usually open-ended, which means they have the flexibility of taking in new money, perhaps offering some liquidity. Investors also need to remember the lessons of the GFC and check the gearing in trusts: most of the better listed trusts have gearing levels between 20 and 40%.

Listed property trusts (now called A-REITS or real estate investment trusts) generally offer average yields of between

5.5 and 6.5% and the established trusts have lowered their gearing levels to 30% or below. The listed trusts also provide a benchmark to measure unlisted alternatives because of the high level of research information.

The largest diversified AREITs by market capitalisation – GPT, Mirvac (ASX Code MGR) and Dexus (ASX: DXS) - in descending order of market size – yield around 5.4%, while Stockland (ASX: SGP) is on a prospective yield of 6.4%, reflecting its high residential property component.

The recognised retail property trusts are Westfield Retail Trust (ASX: WRT), yielding 6.5% and selling at 15.8 times forecast 2013 earnings, and CFS Retail (ASX: CFX),which owns the iconic Chadstone centre in Melbourne. According to consensus forecasts from FN Arena, it

residential alternatives

by barrie dunstan


Bricks and mortar is alluring, but isn’t the only way you can access the property market. Investing in property trusts, both listed and unlisted,

should also be a consideration particularly for the smaller SMSF.

is trading on a prospective 2013 yield of 6.7% and a PE of 15.0 times.

Unlisted trUstsInvestors need to be careful with unlisted property because this area has attracted a swarm of promoters, eager to sell often doubtful propositions to the booming SMSF market. You need to ensure not only that the trust syndicate’s assets are properly valued and income earning, but also that they do not rely on excessive borrowings.

Perhaps the safest method is to rely on established operators in the unlisted field, such as Charter Hall, Centuria and the Australian Unity Group. These operators have several well-established unlisted property trusts, which invest in single commercial properties or niche sectors of the market, such as hospitals and nursing homes.

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1. look for ‘lifestyle’ locations.There will always be demand from both owner-occupiers – who set property prices – and renters. It’s all about thinking like the tenants you want to attract. If you’re looking for affluent young professionals with disposable income, you want to be near the café scene, restaurants, cinemas, or beaches, in some cities; while also being close to public transport links to the city. Families will place more importance on proximity to good schools (or the public transport links to make good schools accessible), nearness to hospitals, parks and shopping centres.

Tenants drawn to lifestyle hubs are more likely to wear higher rent (and rent increases) than families in outer areas.

2. don’t go for the lowest common denominator. You’re looking for a suburb (or regional area) where there is high rental demand: there will usually be something that generates that demand, and a palpable buzz of activity – for example, a university or a big hospital. That’s fine, by all means ride on the wave of lifestyle that these kinds of neighbourhoods bring, but that doesn’t mean you should be looking for a low-quality house to rent to students or nurses.

3. try to bUy in an area that is going throUgh ‘gentrification’. As certain suburbs graduate to hip lifestyle hubs, they get more expensive. But the spillover effect from disappointed buyers and renters starts to seep into adjacent postcodes. Try to identify this cycle, and play it. Buy where there is limited land available – not where there’s a lot of new developments, or lots of open spaces. If there is plenty of scope in the area for new development, then that could push prices down.

4. don’t go on gUt feel – Use all the research tools yoU can.As with investing in shares, these days there is a large amount of historical performance data and research on residential property. There are many data sources that you can use to track and forecast the performance of your residential investment, such as Australian Property Monitors, RP Data, Residex, SQM Research, Ironfish, Metropole and www.propertyobserver.com.au. Prices,

Location, location, location and thinking like your prospective tenant are the most important things you can consider

when it comes to buying bricks and mortar.

seven tiPs for buying an

investment ProPerty

by james dunn

think like a tenantWhether a residential investment property is owned within super or outside super, the principles of making the investment don’t change. You’re looking to buy the best possible property to give you the highest, most sustainable income stream possible.

capital growth, rental returns, vacancy rates – you can never get enough information on the suburb in which you’re thinking of buying.

5. both bUyers and renters will pay a premiUm for peace and qUiet and convenience. Everyone wants a quiet, tree-lined cul-de-sac close to a park, but they’re rare. You do need to look for some sort of ambience. If you’re looking at a property in what you think is a quiet street, try to make sure that it is that way all the time: try to check out what it is like during the morning and afternoon ‘school runs’ – it might be a cut-through street – as well as the office peak hours. If it is close to a lifestyle hub, just make sure that it is not too close to that late-closing pub that does great business at weekends. 6. detached hoUses versUs UnitsDetached houses tend to provide better capital growth than units, because of the


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underlying land value. But apartments often generate higher income yields. Remember that an established property has a better history to it, you can get comparable sales history, and you have at least the opportunity to buy below intrinsic value.

Then you have to think about the ‘feel’ of the property: again, thinking like your potential tenants. If you want to attract families, the more bedrooms you can offer, the better. Don’t go for one-bedroom or studio apartments – it cuts your options, even if it makes it more affordable. If you do want to go for smaller apartments, a good rule of thumb is to look for properties larger than 50 square metres – especially if you are borrowing from a bank as many have a credit standard that prevents lending for an apartment under this size. If possible, try to offer a functional floor plan, a balcony, internal laundry and off-street parking space – the kinds of things that tenants want.

7. get help and get it right. Before you buy, get all the professional help you need. A building survey, property inspection and pest inspection are a must and will tell you what condition the property is in, and give you a good idea of the required maintenance spending for which you will need to budget. It never hurts to get more than one opinion either. Then, when you are ready to buy, use the help of a buyer’s advocate or some other form of professional help – at least run your checklist past a property professional.

Be careful from whom you get advice – a project marketer won’t charge you anything, but he or she could be in line for a 10-15% fee from the developer. If the advice is free, be cautious about it.

BeFOre YOU BUY, geT ALL THe prOFeSSIOnAL HeLp YOU neeD. IT never HUrTS TO geT MOre THAn One OpInIOn eITHer.


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five mistakes to avoid when buying

ProPerty in your smsf

by jo heighway

Buying property in your SMSF is becoming more popular, but there are traps that many first-time investors fall into. get it right the first time.

Understand the rUlesBuying and holding property in an SMSF has never been more popular.

It certainly makes sense for trustees to consider investing in property in their SMSF. There can be significant tax advantages, not to mention the opportunity to diversify the fund’s investment portfolio.

Promoters of borrowing to buy property in an SMSF have certainly had a role to play in increasing the numbers of super funds holding property, rightly or wrongly. Limited recourse loans are great for some, but not a strategy that fits all.

Whether investing in commercial or residential property, special rules apply when buying a property in your SMSF. Even the most experienced property investors can find it easy to make mistakes.

Here is a list of the top five mistakes I see every day:

1. transferring yoUr residential property into yoUr smsfIf you own a residential rental property, you

cannot sell or transfer it into your self-managed super fund. The only property your SMSF can buy from you or any of your relatives is ‘business real property’ – property used wholly and exclusively in a business.

2. registering property ownership It is very important that the property is registered in the name of the trustee company or individual trustees of the SMSF with the relevant state land titles office.

Alternatively, if the property was purchased using a limited recourse loan, the legal title should be held by the trustee of the bare trust, not the trustees of the super fund. If the property is registered in any other name, you should seek immediate legal advice to correct the land title records.

3. leasing residential property to members or their relatives:only commercial property

can be leased to related party tenants.NEVER let any member or relative of a member rent a residential rental property from your SMSF. In fact, don’t let members or their relatives use your SMSF’s residential rental property at all, whether they pay rent or not. This includes holiday houses.

4. failing to collect rent from related party tenantsIt is a common strategy for an SMSF to buy a commercial property and lease it back to members for their business.

It is also an extremely common mistake for the business to forget to sign a written lease agreement and/or forget to pay rent.

Rent must be paid by the business to the SMSF on commercial arms-length terms. So I recommend obtaining a rental valuation, documenting a written lease agreement, and ensuring rent is physically paid to the SMSF monthly in advance.

5. borrowing withoUt the right docUments in placeWhen you borrow to buy property in your SMSF, there is a series of important documents that must be put in place. The loan must be a limited recourse loan, and the property must be held under a bare trust arrangement.

Seek advice from a specialist SMSF advisor before borrowing in your super fund to make sure you get these documents right.

If in doubt, ask your auditor! There is no reason you have to wait for the end of the year to show your auditor what you’ve been up to. If you want to get it right first time, communicate with your auditor and make sure you get your strategy right before you finalise anything.


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don’t overpay stamp dUtyWith Limited Recourse Borrowing Arrangements (LBRAs) all the rage, I thought it might be a good time to detail some of the common problems that arise with these transactions.

LRBAs involve a super fund borrowing money to purchase an asset. While the loan is outstanding, the asset must be held in a holding trust. Thus far, most assets purchased in this structure involve real estate.

These transactions are surprisingly easy to muck up. If it is completed incorrectly, it’s actually possible to pay full ad-valorem stamp duty on a number of different occasions for the one property purchase.

The most common mistakes involve stamp duty and the order in which various documents have to be executed.

get the borrowing structure right

the first time

by tony negline

1. the timing of the contract of sale in relation to the holding trUstThis varies in each state and territory and depends on where the property is located.

In New South Wales, Tasmania and the ACT, you must sign the contract of sale before you execute the holding trust. At a practical level, if you’re going to have a separate company as trustee of the holding trust (and this is considered best practice), then you would need to have that company set up before signing the contract. Also, you need to leave a period of time – at least one day – after signing the contract of sale before executing the holding trust.

However, in South Australia, Queensland and the NT, you need to execute the

holding trust before signing the contract of sale. In Victoria and Western Australia, it doesn’t matter what order you execute these documents.

2. the pUrchaser’s name on the sale contractIn New South Wales, Victoria, Tasmania, ACT, South Australia and Queensland, only the name of the holding trust is put on the contract of sale. This means there are no references to ‘as trustee for holding trust’ or ‘as trustee for SMSF’ and so on.

Only in Victoria can you purchase the property using the ‘and/or nominee’ provisions. This isn’t available in any other jurisdiction, so make sure you don’t successfully bid at an auction and seek to change details on the contract once you’ve got around to creating the holding trustee company or your SMSF.

In the NT, the detail on the contract of sale needs to be very specific and very detailed. (More details can be provided if required).

For Western Australian properties, the contract needs to mention the holding trustee and the SMSF trustee. 3. who pays the deposit and whenThis must be paid from the SMSF’s bank account. If any other bank account is used, then it’s likely that full ad valorem duty will be payable. This is the case in every state and territory.

What about deposit bonds? These are a type of insurance that guarantees the deposit will be paid at settlement. These can potentially be used but it’ll depend on the wording of the deposit bond and the relationship created.

What about bank guarantees? (These are sureties provided by a bank to a third party.) Some of these appear to be acceptable, but it again comes down the

toP five issues involving these transactions

Borrowing to invest in property is becoming increasingly popular for SMSFs, but there is plenty of paperwork you need to navigate.

wording and the relationship created. For both deposit bonds and bank guarantees, you should get good advice from an experienced superannuation solicitor. 4. what can be inclUded in the contract?Under the super laws, you can only purchase a single asset. Chattels in a property’s sale contract are separate assets, so you need to be careful here. Always check with your conveyancing lawyer what is considered to be a permanent fixture (and therefore acceptable) and what is a chattel (and therefore not allowed). Any chattels included in the contract will have to be removed before settlement.

5. pUrchasing property developments off the planIn New South Wales, Victoria, Tasmania, the ACT and Western Australia, you need to sign the contract of sale before executing the holding trust deed. This means you need to draft the title particulars used for the contract but not the holding trust deed. The best approach is to sign the holding trust after the final title particulars are issued just prior to settlement.

In South Australia, Queensland and the NT, you sign the holding trust deed before the contract. This means the final title particulars aren’t known when the holding trust is executed. At a practical level, the only way around this is to attach a copy of the contract to the holding trust deed.

The description of the property on the holding trust is very important because the stamped holding trust deed is used to apply for concessional stamp duty when the loan has been repaid and the property is transferred back to the super fund.


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Ever since the onset of the GFC, there has been general weakness in many of the major commercial office markets. A lack of local buyers, combined with weaker offshore demand due to the high Australian dollar, kept prices subdued and presented good buying opportunities for astute investors. In addition, many A-REITS (listed property trusts), normally active buyers, were trading at discounts to their net tangible asset backing (NTA) and, as a result, focused on share buy-backs rather than purchases of hard assets as the more efficient use of their capital.

As we move into 2013, a number of these factors have started to reverse. Offshore buyers have returned to the market, A-REITS are moving back into acquisition mode and other institutional and wholesale investors are again looking at property and driving demand for quality assets.

prospects strongMost of the offshore and institutional demand is focused on ‘core’ or ‘premium’ assets, which consist of the larger modern office towers in the major CBDs. However, there is value in secondary commercial assets. These are generally assets in the $50-$100 million range. Most A-REITs and superannuation funds target properties above $100 million, and private investors rarely look at stock over $50 million, leaving a gap in the market. Yields for secondary assets are at higher than historical levels and are likely to revert to mean levels over the medium term.

On the leasing front, different markets

by jason huljich

commercial ProPerty continues on the uP

have seen quite different results. Both Brisbane and Melbourne were strong leading into 2012, but have slowed since mid-late 2012. Vacancy rates in both centres have gone up markedly, with Brisbane moving from 8% at the end of July 2012, to 9.1% at the end of January 2013, and Melbourne moving from 5.6% to 6.9% over the same period.

The Brisbane slowdown was caused by new supply coming into the market and the easing of the mining and energy sectors, as circa 25% of Brisbane’s office space is leased to companies associated with these sectors (this compares to circa 50% in the Perth market and 10% in Sydney). Melbourne, on the other hand, has had a very strong run for the last five to six years and its slowdown had been caused by a slowdown in the state economy and a lack of investment by the state government. Some new supply has also not helped.

By contrast, Sydney is holding up well. Vacancy rates have reduced by nearly 1% between the end of July last year and the end of January this year and now sit at 7.2%. We anticipate this trend to continue, as supply remains constrained.

There has been some speculation about the effect of Barangaroo when it comes online between 2015-2020, but given that it represents only 300,000 square metres of new space in a total of over 4.86 million square metres of existing space, we don’t expect the effect to be dramatic. This contrasts with Melbourne, when you consider that the Docklands development equates to almost 1 million square metres of space in a market that totals only 4.22 million square metres.

sydney the pickWe continue to favour the Sydney CBD market for a number of reasons. Rents and property prices have only just started to improve from their low levels, but they are still very much at the bottom of the cycle. Looking forward, strong demand, combined with constrained

With residential property markets showing signs of improving as low interest rates and improved consumer sentiment start to kick in, there are still good opportunities to be found in many of the major commercial markets – you just need to know how to identify them.

supply, will continue to put pressure on vacancy rates and it is essentially this tighter leasing market that we anticipate will drive growth in prices and value over the medium term. In addition, even though business confidence remains weak, we do expect New South Wales to record higher growth over the next few years, in part driven by increased investment.

However, even though Sydney is our pick, Melbourne and Brisbane, which are experiencing short term challenges, also continue to offer good buying, but only where we can see potential outperformance. Our focus is on what we characterise as ‘core plus’ opportunities, where we can add value through our hands-on expertise, including leasing and refurbishment programs as well as active management of the tenant mix and profile.

Ultimately, while some markets are definitely better performers than others, market conditions in general favour unlisted property at the moment. Yields are high by historical standards and there has been a marked increase in the quality of the property purchased by managers of unlisted funds. Of the major commercial markets, Sydney looks the most positive overall, but a careful assessment of all opportunities shows that the right property in some of the other commercial office markets can still provide strong yields and the potential for excellent capital growth.

Investors can access these opportunities through unlisted or listed property funds like those offered by Centuria, Charter Hall and the Australian Unity Group, to name a few.

desPite the Pick-uP in activity, our view is that there are still good Purchasing oPPortunities in Major Markets.


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residential ProPerty outlook for 2014

by louis christoPher

Like never before, our residential property market is highly dependent on the larger economy – the macro forces such as interest rates, the exchange rate, federal and state government policy and also the decisions of our major banks.

The reason why the housing market is so sensitive, is because the level of housing debt to incomes is very elevated (at 150%), making our overall housing market highly geared. And, just like other assets that are leveraged, that means when conditions are right, the market can provide some great returns. And it also can be quite dangerous as well, when leverage works against you.

So this is a market that needs low interest rates and ideally, other macro forces running its way. And so far this year, the market has, more or less, got what it wanted. Our SQM Research Housing Boom and Bust Report released back in September 2012 forecasted a 4% to 7% increase in 2013, as measured by the Australian Bureau of Statistics (ABS).

The ABS released their March quarter results in early May, where the weighted average of eight capital cities rose 0.1% from the December quarter (up 2.6 year-on-year). So for now, 4% to 7% looks like the money for this year.


The general consensus is that the residential property market is recovering in most major states and cities. But what of 2014? The long-term scenario will depend on a number of factors.


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increases rates by 25 to 50 basis points in 2014.

A rising terms of trade will help propel the housing market within the mining states of Queensland and Western Australia. A rising Australian dollar, however, could dampen growth in the service-centric cities of Sydney and Melbourne, which are sensitive to a rising dollar. Rate hikes in 2014 would not dampen the market until late that year. But dampen they would.

story 3The terms of trade stabilises, while the RBA cuts rates by more than 50 basis points over 2013. The Australian dollar continues to trade close to parity.

In this scenario, the terms of trade would stabilise close to the levels witnessed in September 2012, while the RBA would continue to cut rates by over 50 basis points over 2013. The Australian dollar would continue to trade close to parity.

Big interest rate cuts, a stable terms of trade and Australian dollar, will help stimulate the housing market within the country.

story 4The terms of trade recommences its fall around mid-2013. In response, the RBA cuts interest rates, while the Australian dollar falls below parity.

In this scenario, prices of hard commodities once again begin to fall.


Well at this stage, there are many X-factors that could play out. We have highlighted five stories to consider, and their impact on the national housing market.

story 1Terms of trade remain stable throughout this year and next. The RBA has cut rates by 25 basis points in May, while the Australian dollar (AUD) continues to hover just above parity to the US dollar.

This scenario is closest to the one transpiring at present. Over 2012, the RBA cut interest rates from 4.25% to 3%, which has already helped slightly boost the domestic housing market. While discussion surrounding the RBA’s interest rate policy continues, the jury is still out on whether there will be further cuts going forward. A recovery in Sydney, Perth and Darwin housing markets is already confirmed and there are some modest, yet positive, signs elsewhere. Further rate cuts will likely intensify the rate of this recovery into 2014. story 2Terms of trade recovers and the Australian dollar begins to rise towards $US1.10. The RBA continues to keep interest rates on hold in 2013 and

but what of 2014?In response, the RBA begins to cut interest rates to cushion the blow of the falling terms of trade, which is accompanied by a decrease in the Australian dollar also. The impact of such a scenario on the housing market is likely to be minimal to begin with. However, such a situation could have ripple effects, negatively impacting certain cities such as Perth, Darwin, Brisbane and Adelaide.

The danger present in this scenario is in the RBA being slow in cutting rates. The RBA might look at prolonging the rate cuts due to concerns about fuelling a new housing bubble. However, in not responding quickly enough, the economy and the housing market could slump.

story 5The terms of trade rises but is accompanied by accelerating inflation at around 6% by late 2013. The RBA lags inflation and increases interest rates in late 2014.

In this scenario, inflation breaks out above the long-term national average, hovering close to 6%. The terms of trade also witnesses gradual increases. The RBA, however, is seen to be lagging inflation in terms of raising interest rates.

An inflationary environment is considered to be stimulating for the housing market. With inflation breaking out above the long-term national average of 3%, the housing market could witness growth within the country.

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Property Investing - Switzer Report · 2020-05-19 · Propertythe smsf guide to Investing....

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