As more people become interested in buying properties through different investment vehicles, a self-managed super fund (SMSF) has turned into a popular alternative.
Like any other investment channel, super funds also present their own risks in terms of real estate acquisitions via an SMSF. According to Sentinel Property Group, buying property through super funds has a correct and incorrect way of doing; otherwise, investors are bound to face steep consequences such as huge penalties.
Superannuation funds such as an SMSF can contain real estate as part of their portfolio, but not overly so that it becomes similar to a real estate investment trust (REIT). Thanks to revised rules in Australia that allowed borrowing inside superannuation in 2007, property became a viable type of investment for SMSFs, according to Kane Munro of Accountancy Online.
Munro advised investors to be cautious in dealing with properties using their SMSF, as the risks can be as significant as the rewards. Penalties await those who merely buy property without seeking financial advice, so make sure you discuss the prospect first with an accountant or a financial adviser.
Pauline Vamos, head of the Association of Superannuation Funds of Australia, agreed that investors should seek professional advice before putting properties in their SMSF.
With Great Rules Come Great Scams
As the revised rules in borrowing money to invest in real estate partly led to an increase in SMSFs since 2007, so did fraud and tempting offers for trustees geared toward property purchases.
Vamos cited vague rules and regulations surrounding property investments via super funds as one of the reasons for the proliferation of scams. These schemes frequently disguise themselves with the allure of up-front packages, with some even including overseas holidays in exchange for buying property.
Investors can protect themselves against risk with one golden rule to remember: loans made via SMSFs are more complicated than a typical home loan with stricter rules, so it’s important to diversify your portfolio to mitigate risk.