Monday, 16 February 2015

Trap #7 When Buying a Property in an SMSF: Not leaving any spare cash in your SMSF and Not Repaying the Loan

Believe it or not, some people, after buying a property in their SMSF, paying for all the stamp duty, loan fees, financial planning fees etc. leave nothing in reserve to pay for unexpected expenses. As pointed out in Trap #4 & Trap #5 unexpected price hikes in rates, body corporate fees and a possible land tax bill can catch you short and you may need to top-up the cash in your SMSF with your own personal contributions. Don’t fall into this trap and leave at least 10% of the property purchase price in cash reserves. So if the property cost you $500,000 leave $50,000 in liquid form so you can access it quickly if needed.

Any excess cash over and above your buffer you should use to pay down the principle of the loan as soon as possible. With the loan balance declining, your interest expense will reduce and the property net returns will then start to grow and add to your super balance. Don’t forget, you cannot redraw on the loan repayments but then again this is not the purpose of the loan nor setting up the SMSF in the first place. You should not dip in and out of your super nor redraw from the loan. Your super fund is there to provide benefits to you in retirement. The last thing you want is getting to retirement age and you still have a substantial loan balance to pay off. When you retire you cut back on work hours or stop working completely. How will you afford to keep making loan repayments from your superfund if minimal or no super contributions are going into your fund from employment? Don’t fall into this trap, pay down the loan as soon as possible. 

Whilst utilising an SMSF structure to leverage into a property investment has its advantages, make sure it makes good financial sense before you jump in. Remember, the sole purpose of a super fund is to provide benefits to it’s members (you) in retirement. I’ve seen numerous people, holding onto a loss making property for 3,4 and 5 years, hoping it’s increasing in value whilst it is eating away at the cash in their SMSF. Do not fall into this trap. It’s not an investment if it’s taking money out of your pocket each month rather than putting money in.

What should you do if you realise that you have a bad, loss-making property in your SMSF and now, after reading this chapter, you regret purchasing it in the first place? Simple; you MUST sell the property and start again. Armed with your new knowledge, you need to correct your mistakes. Don’t cling to the hope that one day the property will perform and will start to contribute cash-flow to your superannuation balance. The property may go up in value, but until that happens, your superannuation is going down in value. In addition, think of all the years you need to hold on to that property, hoping and praying that things improve. These years are lost and your retirement capital could be invested in a better, cash-flow positive property that is growing your retirement nest egg, not eating into it.

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