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Is this investment plan ‘an accident waiting to happen?’

Investment, clock

Should the political atmosphere shift, Aussie investors with this particular asset could be heading for a fall, a research group has said.

RiskWise Property Review has warned that buying property within an SMSF is an “accident waiting to happen”, especially given the political climate.

Noting that the number of SMSFs borrowing for property has increased rapidly in the last few years, RiskWise CEO Doron Peleg argued that it remains a dangerous path.

“It really is a high-risk endeavour, and, in fact, Labor will move to ban borrowing against SMSF if they are returned to power in the next federal election,” he said.

“What this means is that many individuals fall into debt they can’t climb out of as their SMSF hits the ‘rock bottom’ known as a ‘property bust’.

“In addition, RiskWise research has shown off-the-plan properties are very popular with SMSFs,” Mr Peleg continued, noting that this is possibly due to SMSF rules preventing them from living within the investment property.

As such, these particular dwellings are more suited to tenants. However, he warned that off-the-plan properties are also at a high level of risk, largely fuelled by a potential oversupply.

This in turn could trigger “squashed” property values, higher vacancy rates and softer market conditions.

Mr Peleg continued, “The three major types of risks associated with over-supplied OTP high-risk suburbs are equity risk, cash flow risk and settlement risk, and they all add up to potential disaster for the anyone staring retirement in the face. Especially as set-up costs for these types of borrowings can often have higher fees.”

With this in mind, Mr Peleg advised those considering buying property through an SMSF first think of the potential loss of income if an oversupply does eventuate.

“Super is the only asset class you can leverage against, but using it to buy property is definitely high risk if things go wrong and, frankly, an accident waiting to happen,” he said.

However, Mr Peleg’s opinion is not shared by Omniwealth financial planner Andrew Zbik.

Conceding that the strategy is not suitable for all SMSFs, he said the restrictions around borrowing for property within SMSFs are actually stricter than for other property investors.

Mr Zbik said, “Some lenders are requiring at least a 10 per cent liquidity buffer when buying a property in a SMSF. This can be in the form of cash or other liquid assets such as shares. No such requirements if you are looking to buy a 100 per cent leveraged property in your own name.”

Further, for SMSFs to borrow within a limited recourse borrowing arrangement (LRBA), a 30 per cent deposit is required, and stamp duty fees need to be covered by cash within the fund.

As such, SMSFs generally need to cover between 35 and 40 per cent of the purchase price in cash.

Mr Zbik said, “This strategy is not for anyone. I encourage clients need at least $200,000 in super before they even consider opening a SMSF – this is in line with ASIC’s guidance to the minimum amount needed to open a SMSF.”

Is this investment plan ‘an accident waiting to happen?’
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