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SPONSORED POST
You put funds aside during your working years to support your retirement income needs. In Australia this is partly managed by the mandatory employer contribution to superannuation. 
Some think this will be sufficient to meet their needs. However, if you wish to live the life portrayed in your imagination and the advertising you also need to contribute. Jeremy Cooper, the Chair of the Federal Government’s Super System Review and Chairman, Retirement Income at Challenger, said it would cost about $1M today to buy a Government Pension for retirement. This $1M would buy an annual income of about $33,717 for a couple with no additional Government benefits.
You need your superannuation funds to grow for two reasons: firstly, because inflation is constantly eroding the spending power of these savings, and secondly to provide more choices in your retirement years. To support your choices you need to appreciate capital growth, inflation, and the role of leveraging through borrowed funds. 
Inflation
Superannuation saving begins in your teens or twenties and you want your money to have the same spending power in your sixties, seventies and eighties. However inflation is constantly reducing the value of money as goods rise in price over time. 
Inflation, which we measure as CPI, at 2% per annum means an income of $100,000 in year one buys only half the same goods in year 37. Many now expect to live beyond 80 or even 90 years, and the impact of inflation in retirement is a key concept to appreciate. It is in these latter years of your retirement that your health care costs can really escalate. If your spending power has reduced over time you may not be able to afford the care you need. 
If you invest your superannuation via a bank account it is unlikely your money would maintain its spending power over time, as the returns from interest after tax are not high enough. If you had invested in property it has maintained the value of your money and maintained your spending power over the last 30 years and more. 
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Capital Growth
Most are keen for their superannuation savings to perform, to grow at a rate greater than inflation. This performance increases the risks to the funds, however you need to invest in assets that grow. 
Because of the past performance of property many of you are confident to invest. Most of you have own your own homes, have seen them rise in value over the years and have successfully managed your debt. 
Leverage
Most of you intend to borrow money to invest in property, and in an SMSF lenders typically will lend up to 70% of the value of the property and sometimes up to an 80% LVR. 
This leveraging increases the returns on your investment. If you have $100,000 invested in a $300,000 property and it grows by 7% per annum then you have made three times that amount on your money and have a 21% return. It is this multiplying effect as you leverage your money with borrowed funds that creates much of the wealth from property. 
Many property investors buying property outside of super, leverage their properties hard to create strong returns on investment. Many plan to release equity to boost their capital to re invest. Inside of super the rules are quite different. You can’t release equity from a property as it grows in value. Rather the decision is to hold or to sell. 
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Why property investment through an SMSF? Forrester Cohen

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Self-managed superannuation funds are gaining popularity as more people seek control over the investments they hold in the compulsory retirement savings system.
At the end of December, 1,034,497 people had an SMSF, up from 983,982 at the same time a year earlier, the Australian Taxation Office reports.
These funds held a total of $568 billion in investments, of which more than $21 billion was invested in direct residential property. Almost $70 billion was invested in direct commercial property, ATO figures show. The value of the SMSF sector represents close to 30% of all funds in superannuation showing the depth of the desire people have to control their own investments and their belief they can do better than the professionals.
Property is appealing to SMSFs partly because it is a long-term investment. You can’t withdraw savings from superannuation until retirement so it makes sense to hold long-term assets there. 
People have had success investing in their own homes and believe they can bring that success to their SMSF.  However when PIAA interviews property investors about their knowledge of the market place over 90% comment that they know a lot about property but they don’t know how to move forward with the selection of a property for performance to their goals and time frames. In SMSF it is particularly important to invest in property that has long term performance support and has strong exit appeal to support its re sale as mandatory SMSF draw downs require.
Investment property can deliver attractive income levels when compared with assets such as term deposits, bonds and some Australian equities. On top of that there’s the prospect of capital gains.   
There are significant tax advantages to holding property within superannuation. Rental income is taxed at 15% and capital gains is taxed at only 10% after 12 months while the fund is in what’s known as accumulation phase, when the members are making contributions to its balance.
After the members have retired and start drawing a pension from the fund, any earnings and capital gains are tax free.  This can save tens of thousands of dollars in capital gains tax compared to holding a property in your own name.
Taxation rates on income to superannuation at 15% are also lower than all marginal taxation rates.  This means it can cost you less to earn the funds to invest in property in an SMSF than from your post tax savings account. 
Property held through superannuation qualifies for the same tax deductions as property held outside of a fund.
Residential property investments can also be used to protect against inflation, which is a significant risk to retirement savings as it erodes the purchasing power of money over time.
The Reserve Bank of Australia aims to keep inflation, measured by the Consumer Price Index (CPI), at between 2% and 3% a year over the medium to long term.
A 3% inflation rate means that every dollar worth of goods or services today will cost $1.03 in a year’s time. The effect compounds so in 10 years’ time, one dollar’s worth of goods today will cost $1.34. 
A well thought out investment strategy should have a plan for combatting the effect of inflation.  
Residential property can offset inflation as capital gains should, at a minimum, keep pace with the inflation rate. Rental income should also rise in line with CPI.  Residential property is more effective at combatting inflation than money in the bank, and is generally considered lower risk than shares by financial planners.
In reality, the capital gains made on residential property in most parts of Australia have surpassed the inflation rate over the long term.
Research from Corelogic RP Data shows that across Australia’s eight major capital cities, home values increased by a cumulative 38% from the beginning of 2009 to the start of 2015. Each market rose over that period with Melbourne property increasing in value by 51.8% and Darwin homes gaining 24%. Sydney’s market was the strongest performer with prices rising by 56.9%.
A longer term analysis by CBRE, presented in its most recent Global Living report, found property values in Australia gained 221% over the 30 years to the end of 2014.  This result was second only to the UK of their surveyed countries.
CBRE attributes the strong result to Australia’s economic resilience, low interest rates and comparatively stable political landscape.  These are key indices of a strong property market and indicate strong capital growth drivers.
One such driver, population growth, has been stellar. Sydney’s population has increased by 15% over the past decade and is expected to grow by a further 25% between now and 2029.  This is growth rate is amongst the highest in the Western world and higher than many Asian and African countries.  Significantly this increase is driven by our immigration policy rather than births, 457 visa recipients are often highly paid and very motivated to enter the property market.
Housing supply has failed to keep pace with this rising demand. CBRE says Sydney’s property supply is “restricted by land availability through geographical limitations, zoning, planning restrictions and suitable infrastructure”.
Housing Industry Association research confirms that over the past decade demand for housing has outstripped supply all around the country.  Identifying imbalances between supply and demand is one of the five key capital growth drivers to support due diligence.
Access the market
Investors with a large enough balance in their SMSF can buy residential property outright. Alternatively, SMSFs can borrow to invest using special lending facilities, known as limited recourse borrowing arrangements.
Borrowing to buy residential property can magnify the returns on the investment.  If your SMSF invests 33% of the value of the property and you borrow the balance then you have increased your returns three fold.
Say you have $250,000 to invest in property through your SMSF. If the property increases in value by 8% in the first year, the capital gain would be $20,000. By borrowing an additional $250,000 to buy one or two properties worth $500,000, you could double your capital gain to $40,000, assuming all properties increased in value at the same rate.  If the property portfolio was leveraged at 66% then your return on investment would be 24%. This is higher than most commercial funds over recent years.
With current LVRs for SMSF borrowing at 70 to 80% and very low interest rates many properties can be held as cash flow neutral, with depreciation benefits creating a small loss to be offset against other income or carried forward.
It’s important to note that should property values fall, any capital losses would be similarly magnified by borrowing. Rental property is not a risk-free investment and buying investment property through an SMSF will not suit every investor.
For more information on self-managed super funds (SMFS) and property investment, download Forrester Cohen's <a href="https://www.urban.com.au/property-observer" target="_blank">U</a><a href="https://www.urban.com.au/property-observer" target="_blank">ltimate guide to property investment, Part One, Property and SMSF here</a>.
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Tax advantage factor in super property investment: Forrester Cohen

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People who invest in real estate through a self-managed superannuation fund should have an exit strategy in mind for their property from the time they acquire it, even if they plan to hold the investment for the long term and pass it down through the family.  This exit may be based on performance criteria as you would do with any other asset, or may be based on income requirements.  It also needs to include the considerations for a number of unexpected circumstances.
There are many scenarios in which an SMSF’s trustees may wish to sell a property. They may identify a better investment opportunity elsewhere and want to realise a capital gain on the property.  They have identified their funds have a better opportunity to out perform the market in another property investment.
The fund may need to pay out pension benefits to retired members and find its income is insufficient to cover the payments. Or, one or more of the members may die, requiring the fund to make a lump sum inheritance payment. 
Whatever the reason for a sale, the fund should have plans in place for disposing of the investment.
For real estate, this starts with the capital growth drivers that increase the performance of the property and filters down through to the property selection. 
The location, type and features of the property should appeal to other buyers, as well as to tenants.
The demographics, economy and employment prospects in the local area will affect buyer demand. Homes in large cities and towns typically sell more quickly than those in regional areas as there is a larger pool of buyers. 
In general, residences that are close to transport and amenities such as shops and schools will be easier to both rent and sell than those in less convenient locations. A well-maintained home with parking, practical living spaces and a tidy kitchen and bathroom may be easier to sell than an awkwardly laid out property that needs work. 
There are many dimensions to buying well for income and capital gain. People purchasing property through an SMSF, like other property investors, should do their research and consider what will appeal to other buyers as well as to tenants. 
Timing
The timing of a property sale will be driven by a range of personal and market factors. 
Assuming the SMSF’s trustees have control over the timing – rather than being forced to sell due to a member’s unexpected death for instance.  While the most tax effective option is usually to continue to hold the property in the fund until the members have retired, there may be performance criteria that drive the timing of an exit.
After the members have retired and converted the SMSF into a pension, all fund income, including capital gains, is tax free. Before the members’ retirement, capital and income on investments in the fund are taxed at 15%. 
Property owned through an SMSF, like property held directly outside of superannuation, qualifies for a capital gains tax discount if the asset has been held for more than 12 months. The CGT discount for property owned inside an SMSF is one third of the gain. That means the fund pays 15% tax on two thirds of the capital gain if it is sold before its members retire.
Say an SMSF sells a property making a capital gain of $120,000 before its members have retired. The fund will incur a tax bill of $12,000 if it has held the property for more than 12 months. That tax bill could be avoided by timing the sale to settle after the members’ retirement.  However changes in a property market’ stength need to be considered.  In a bear market changes can easily wipe $12,000 from a sale price 
Multiple generations
Strategies that involve for holding property through an SMSF across multiple generations of a family are more complicated. 
Planning for what will happen when a fund member dies needs to take a variety of factors into account. These include whether the property will be sold after a member’s death; whether there is debt on the property; whether it is positively or negatively geared; how the fund is structured; how fund member are related to one another; and whether they are dependants of the deceased, as defined under superannuation law.
Some SMSF trustees decide to sell the property if one of the members dies. That way any debt can be repaid out of the sale proceeds and the deceased fund member’s share of the remaining equity can be paid to their beneficiaries or estate. 
If the trustees would prefer to keep the property after the death of a fund member, the plan should consider how the beneficiaries will be paid their inheritance. It should also consider how the fund will make loan repayments and meet other costs associated with the property without that member’s contributions to the fund. 
Superannuation regulations restrict how property can be transferred when used as a vehicle for holding properties over multiple generations. There are tax consequences for each course of action. 
Trustees should seek specialist legal and tax advice on the best options for their fund.
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How to plan your SMSF exit strategy: Forrester Cohen

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SPONSORED POST
People who buy property through a self-managed superannuation fund need to consider what to do with the asset after they have retired and how to pass it on after they have passed away. 
SMSFs allow for assets to be handed from one generation to another as an inheritance, but there are regulatory constraints and taxes to take into account. 
Reserves after retirement
At retirement, an SMSF member may start a pension from their fund, in which case the balance will reduce over time. The fund may have sufficient cash flow to support pension payments but as the person ages the proportion of the fund’s balance that must be paid out as a pension increases so it becomes more likely that the property will have to be sold to support the pension. 
If the family has other sources of income, and doesn’t need to draw a pension from the SMSF, it is possible to leave the assets untouched by keeping the fund indefinitely in what’s known as the accumulation phase. 
SMSFs in accumulation phase do not issue a pension but the income and capital gains made within the fund are taxed at 15%, while they would be tax free if the SMSF was paying a pension. For some retirees, the 15% tax is still less than they would pay if they held the property in their own name so there can be advantages to holding it in the SMSF to pass on as an inheritance.
Inheritance
When an SMSF member dies, the assets held in their fund do not automatically form part of their estate. The estate can access the assets and distribute them according to the person’s will but conditions in the SMSF’s trust deed and superannuation laws must also be satisfied.
There have been cases in which surviving SMSF trustees have been able to go against the wishes of the deceased fund member. SMSF members should seek legal advice on how to avoid that risk.
SMSF members may provide their fund with a binding death benefit nomination, which gives direct instructions on who should receive the deceased member’s share of the fund’s assets but there are restrictions on who can be named as the recipient. Whether such a nomination is appropriate will depend on the fund member’s personal circumstances. 
Relationships matter
The way in which beneficiaries receive their inheritance depends on their relationship with the deceased SMSF member.
People who are in what’s classified under superannuation law as a dependent relationship with the fund member can receive their inheritance payment as a lump sum or a pension from the fund. People who are not in a dependent relationship must be paid a lump sum. 
Dependants can include a spouse, de facto or ex-spouse, as well as children who rely on the person for necessary financial support or are aged under 18 years. Other people may qualify as being dependants of the deceased but adult children typically do not.
The amount of tax each beneficiary pays on the inheritance also depends, in part, on whether or not they are a dependant of the deceased. Other factors also influence the amount of tax due, including the tax structure of the fund itself.  
In some cases, a property held through an SMSF can be passed from a deceased fund member to their beneficiaries without leaving the fund. The way the SMSF is structured affects how easy and how costly it is to do this. 
SMSFs can have up to four members. They can be established with individual trustees, where each member is also a trustee, or with a corporate trustee where each member is also a director of the trustee company. 
If the fund was established with individual trustees, the titles on the SMSF’s assets and the individual trustees must be updated when a fund member dies. State governments and any administration systems the SMSF uses may charge fees for these changes.
Funds with a corporate trustee can change their members by updating the corporate trustee’s directors. The fund must notify the Australian Securities and Investments Commission and the Australian Taxation Office of these changes but there is no change to the title of the SMSF’s assets.
Are other vehicles better?
Holding property through an SMSF is just one way to pass the asset on through the generations. Other options include owning the property directly, or through another tax structure such as a company or family trust. Each has its advantages and drawbacks. 
SMSFs can be tax effective in some situations but there may be simpler and less costly alternatives. Each family is different and what’s best will vary depending on individual circumstances. Seek professional advice. 
 
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Set up future generations through estate planning: Forrester Cohen

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SPONSORED POST
Every property investor wants to buy well, so they can eventually sell well. But identifying a property that will deliver strong yield and solid capital gains over the long term is not always easy. 
Rental growth has been stagnant in some areas, while capital gains on individual properties are never assured, even in cities where the overall trend has been for price growth. 
Finding a property that will produce a positive result requires in depth research and consideration whether investors are buying directly or through a self-managed superannuation fund.
Investors who buy property through an SMSF typically plan to hold for the long term. The fund should have an investment strategy that documents its goals for holding investment property. This should consider diversification and liquidity requirements. Properties are high value assets making it difficult for a fund to be diversified unless the balance is large. They are also illiquid, meaning they can’t quickly be sold for cash.  
There are restrictions on the types of improvements SMSFs can make to properties they own if they borrow the money, particularly if the fund has borrowed to buy the investment. This means capital growth and rental income, rather than profits from developing or renovating and on-selling a property, will drive investment returns for the fund. 
SMSFs can buy most types of residential new and established property as long as the property is not purchased from anyone related to the fund members. Commercial property can be bought from related parties as long as the transaction meets regulatory conditions such as being sold at market value. 
Where to Buy
Location, price point and the property’s attributes are some obvious features to consider when searching for residential investment property.  Looking at these from a home owners’ point of view gives little depth to the considerations of what will drive the profits.  
There are various schools of thought on the best locations for an investment property. Some commentators advocate buying apartments in inner city areas, while others favour properties in middle and outer ring suburbs, or in regional locations. Schools of thought promote property commentary or opinion and these are real estate skills. It is much better to look to advice that presents and analyses the facts to support informed decision-making.
It can be difficult to predict the capital gains prospects of an area but some factors that influence growth potential include demand as measured by population growth or days on the market, supply as measured by dwelling starts and infrastructure that attracts a regional focus or increases accessibility to regional amenities and employment.
Suburbs where the growth in demand is outstripping the supply of new properties are more likely to experience capital growth than areas where supply and demand are in balance, or where an oversupply is emerging.  
Rental growth and the yield the investment property delivers will be affected by factors such as the appeal of the area, its life style amenities and commute times to employment and educational centres. Rental vacancy rates that reflect the current appeal, can be trended to support in depth understanding.
Timing
Property markets tend to move in cycles where prices rise fairly strongly, then plateau or decline before picking up again.  
Buying into an area where prices have already achieved significant capital gains may not offer the same growth potential as nearby suburbs that have not boomed as strongly. 
Timing entry into any investment is complex and holding for the long term can minimise the risk of a capital loss.  Trended capital growth rates versus days on the market can give much stronger support for informed decision making.
Be wary of areas that are dependent on single industries for their economic success. Mining towns for instance, delivered incredible rates of capital growth during the boom but their prospects are very limited now that investment in the resources sector has slowed. 
What
When considering individual properties look at the demographics of the area and favour the properties that will appeal to the broadest range of tenants for rental and to home owners for your exit.   
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Forrester Cohen

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