Katie Timms: How the current real estate market impacts SMSF trustees

It is difficult to watch the nightly news on television, read a newspaper or scroll through social media without seeing information about the real estate situation in WA. Record low stock of properties for sale and for rent, skyrocketing rents, increasing farm values and regular interest rate rises have led to a perfect storm for property owners and tenants. Recent statistics show over 20 per cent of self-managed super funds investments are held in direct property. The question is, how does the state of the property market impact SMSF trustees? Property has always been a favourite for Australian investors, and recent information about increasing rental yields has certainly not changed this for SMSF trustees. The ability to see where your retirement benefits are invested provides comfort for many. But any property acquisition should be carefully considered. Property is inherently a risky investment that can come with liquidity issues. The inability to sell at the right time, potential loss of tenants and unforeseen repairs or maintenance can put a dent in retirement benefits if too much is invested in property. It may be tempting to look at rents going up and the demand for properties as a positive time to invest but liquidity, current prices and long-term plans should always be considered first. Too much investment in property can cause chaos if you want to retire and access cash at a time when property prices may not be quite as good as they were, or as vacancies creep higher. For some SMSF trustees, considering the trade-off between chasing the highest rent return with releasing fees, and the peace of mind of trusting who is maintaining your retirement asset can be a powerful and difficult decision to make. The ability to retain quality, long-term tenants can provide a smooth flow of income and minimise the stress of having to worry about who is looking after your property. In addition, the recent trend towards ethical investment may present an interesting challenge for future property investments as Australia attempts to address current shortages and costs for tenants. SMSFs have not been immune to the recent impost of interest rate rises, given the increasingly limited ability for SMSFs to borrow to acquire properties. For those who have entered into a borrowing from a related party, the Australian Taxation Office recently increased rates from 5.1 per cent to 8.83 per cent. This will result in a significant hit to cashflow for the upcoming year. Negative gearing is a popular tax strategy for many but deliberately gearing inside a concessionally-taxed environment would need to be carefully considered. Are we honestly thinking about long term growth and returns for retirement? Property will never be far from the mind of many as an investment choice, especially in a SMSF. Understanding exactly how property can fit into your retirement plan is the key. Before any investment is made, you should always consider what cashflow is required for both you, the SMSF and the property, whether you have plans for the property in the future and what compliance is required for reporting and valuing your property investment. Property can absolutely work for you, but it works best when you consider the long-term as well as the current heat in the market. Katie Timms is the national director, superannuation and SMSF services at RSM Australia