Safe as houses?
Borrowing to buy property through a self-managed super fund (SMSF) is a popular strategy sold by some accountants and financial planners. However, it pays to be cautious.
Why? In retirement, you want your super to be liquid, so you can draw an income from it. Having your super locked in a non-liquid asset like property is potentially risky. If you are borrowing money to fund the purchase the risks are even greater, which is why many banks are shying away from offering home loans to SMSFs.
Why? As a non-liquid asset, property has equity, cash-flow and settlement risks. These can mean you don't have access to the money you need to fund your retirement, or worse still, face big losses you can ill afford.
The risks explained
Equity risk is the risk that the value of your property might not grow enough to cover your borrowing costs. This means your retirement savings goes towards paying debt, not creating wealth.
Cash-flow risk is the risk that an investment property becomes vacant, and the owner needs to pay the ongoing costs for periods of time. (Remember, in retirement you might not have an income to cover the gap!)
Settlement risk is the risk a property purchased off-the-plan drops to a lower value once built than it was when the contract was made. In some areas, 50% of property units are worth less than when purchased off-the-plan.
Before you rush into creating a self-managed super fund (SMSF) so you can buy a property, it is worth adding up the risks.
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General advice disclaimer
This is general information only and does not take into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for you having regard to your objectives, financial situation and needs and consider obtaining independent professional advice before making an investment decision. If information relates to a specific financial product you should obtain a copy of the product disclosure statement for that product and consider that statement before make a decision whether to acquire the product.