Why DIY super funds shouldn't snub residential property

Self-managed super funds overwhelmingly favour business property to residential property – sometimes to the detriment of the members’ retirement savings. 

ATO statistics shows that SMSFs have less than a quarter of their $58.9 billion direct property investments in residential. This immediately raising a straightforward question: Why? 

Martin Murden, director of SMSF consulting for services provider to accountants Partners Group in Melbourne, attributes a substantial part of the gap in popularity to the fact that many owners of small and medium businesses hold their business premises in their own funds. 

And Sean Preece, managing director of residential property adviser and buyer’s agency Capital 360, attributes the popularity gap to the higher average yield of commercial properties. As Preece explains, many fund trustees seek a higher yield to service investment loans on geared properties. 

However Preece, who advises many SMSFs on their property investments, argues that residential real estate is an “absolutely” appropriate asset for superannuation. 

Lower average yields aside, residential property potentially has a range of positive features for SMSFs including relatively low volatility compared with other growth asset classes, an inefficient market that opens up buying opportunities, and, historically, solid long-term capital gains on well-selected properties. 

And if a SMSF sells a property when the asset is backing the payment of a superannuation pension, no capital gains tax is payable. (This tax treatment, of course, applies to any growth assets.) 

Further, fund-held residential property can lend itself to some innovative, highly rewarding strategies. For instance, Preece says Capital 360 recently arranged for three SMSFs and three personal investors to each buy an apartment in a six-unit block. The owner of the block agreed to a 15% discount. And an inexpensive makeover of the flats boosted the yields. 

An innovative strategy for couple fund trustees is to buy their future retirement homes through their SMSFs. This strategy can provide excellent retirement savings, tax and lifestyle advantages. 

But be warned there are plenty of pitfalls for SMSFs when buying residential property – particularly if the property is geared.

For more on SMSF and property, see our e-book.

Tomorrow we will look at the top 10 tips for SMSFs investing in residential property.