If you’re not sure exactly what a Self-Managed Superannuation Fund is, it’s basically a super fund that you run for yourself (the clue is in the name) rather than paying your super contributions into an industry fund, giving you a lot more control over where your money is invested. In 2007, the Australian Government allowed Self-Managed Super Funds (SMSF) to borrow to buy property.
Since then SMSFs have become more and more popular. After the tumultuous effect the GFC had on many industry super funds it’s easy to understand why some people would prefer to have more direct control over their money. Having the option to move their super out of a volatile share market into more traditionally secure real estate investments is an attractive option for many people. But as the number of SMSFs continues to grow, some people are starting to voice unwarranted, reactionary concerns over the perceived impact they are having on the property market.
According to a recent report from the ATO, there are now over 500,000 SMSFs in the country, which represents an increase of 29% over 5 years. The majority of those funds are in the “accumulation phase” – which is where they attempt to build their investment portfolio. Critics say that these funds are artificially driving property prices upwards and distorting the real estate market.
However, that’s not actually the case. Borrowing to buy property through a SMSF can only occur under very strict conditions known as a Limited Recourse Borrowing Arrangement (LRBA). The ATO’s Self-Managed Super Funds: A Statistical Overview 2012-13 report revealed that assets held under LRBAs have increased from $497Million in 2009 to $8.3Billion in 2013. While this might sound like a lot, it really only represents 1.68% of the total assets held by SMSF.
Even though there are more SMSFs and the value of LRBA investments are increasing, only 2.7% of SMSF actually have assets held under this type of agreement. Of those agreements, a significant number are for commercial real estate properties. When you look at the overall picture, the actual impact of SMSFs on the real estate market is minimal, so calls for the Australian Government to ban them from borrowing to buy property seem like a bit of an overreaction.
Investing in real estate is a great way to grow your financial security and prepare for your future. If managing your own super fund and investing in property is something you’re considering, there are a number of rules you should be aware of. If you would like a better understanding of the risks and benefits involved with managing your own super fund, the team at Clarity Financial Group are available to provide expert advice and guidance.