Why property investment through an SMSF? Forrester Cohen

Why property investment through an SMSF? Forrester Cohen
Why property investment through an SMSF? Forrester Cohen

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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. 

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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Smsfs Investment

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