Investing for property growth
By Chris Duffield, Head of Property, Dixon Advisory
Renovating for profit p 52 Tax busting property structures p 56 Buying with others p 60
Residential property is one of Australia’s largest and most successful investment classes. So it may surprise that as at 30 June 2008, residential property represented only 3.4% of all SMSF assets. Over the next few years, however, we expect to see a massive increase in SMSF ownership of residential property. This is because new borrowing rules were implemented in late 2007 that allows your self managed super fund to borrow to buy assets, including residential property. The global financial crisis made the uptake of these new rules much slower than was initially expected but we consider now to be an ideal time for wealth creators to consider a geared residential property in their existing or new SMSF. Choosing the right property If you do determine that investing in residential property is appropriate for your SMSF, you first need to ensure that you invest in the right property. When choosing an investment property, it’s not simply a matter of investing in the right city, or even the right suburb. Even properties within the same location can provide investors with very different returns. Take the following example of two similar properties in Darlinghurst
in Sydney’s inner east. A Palmer Street property was purchased in 1999 for $370,000, while a nearby Bourke Street property was purchased for $372,000 in the same year. In June 2002, the Bourke Street property was sold for $772,500. In July 2006, the Palmer Street property sold for $600,000. In 2009, the Palmer Street property had an estimated value of $600,000 while the Bourke Street property had an estimated value of $870,000. So, for the Palmer Street property, the total capital growth was 62% while the Bourke Street property had a total capital growth of 139%. This represents 5% average annual growth for the Palmer Street property and 9% annual average growth for the Bourke Street property. Two properties in the same inner city suburb, but two very different results in terms of investment return. The lesson here is that you really have to do your research into the market in order to choose the right property that will provide the best possible investment return. Or, better still, utilise the services of a professional property investment advisor who can help you find an appropriate property for your portfolio. Buyers advocates can also assist
with not only finding the right property based on the latest market analysis, but they can also help you throughout the entire purchase process, helping you pay the best possible price for your investment. Funding your property investment For SMSF investors, there are basically three options for investing in residential property. The most common way in the past was to own the asset outright. However, this often leaves the fund undiversified by asset class, and is probably part of the reason that such a low percentage of SMSFs currently own a residential property. The second most common option is where you borrow the funds to purchase the property in your personal name and then lend the asset to your SMSF. With this option, you’ll pay the standard interest rate on the loan and your up front costs will generally be in the vicinity of between $2,000 to $3,000. The Loan to Value Ratio (LVR) will depend on your available equity and as you are borrowing in your personal name, the lender will require you to put up your existing home or other assets as collateral. Also, you cannot use the asset for gearing into other investments – that is the new property will not be
able to be used as part of the borrowings required. The third option is to gear into a property through your SMSF. For this option, you will generally pay between $8,000 and $12,000 in up front costs. You will also pay a higher interest rate, which depending on the lender can be between 0.5% and 1.0% above the standard rate. The LVR will generally range between 60% and 70%. Products in this area are rapidly improving, and this option is only now becoming more common. For all readers, and particularly those under 50, who are looking to accelerate their super, this is a great option to consider. Only $150,000 of super can comfortably have you owning a $450,000 property and getting the full benefit of the capital growth of the much larger asset. Of course, a combination of the second and third options may also be achievable and could allow someone with an even smaller super balance to consider residential property. This area is specialised and you need to make sure you are dealing with a group who has experts in all three key areas: SMSF rules; property purchasing; and loan structuring.
Top 5 house sales at least $1m
1 Mosman brighton Paddington balwyn Camberwell
Mosman bayside Woollahra boroondara boroondara
NsW ViC NsW ViC ViC
Total Over 10yrs
3055 1991 1376 713 691
premium to pick up
PrEMiUM ProPErtiEs hAd A toUgh slog dUriNg thE gFC bUt thiNgs ArE stArtiNg to look UP
Premium property values have clearly outperformed the broader market in the last five years despite high levels of volatility according to figures from rP data. National research director tim lawless said even though the premium housing market value is up, sales have still remained low. since 1999 the Australian property market has recorded strong gains until it became victim of the global Financial Crisis (gFC) in 2007. According to lawless Australians’ premium properties had a wild ride over the last three years. Figures from rP data show that last year 19,417 house and unit sales were priced at or more than one million dollars. this is 21% lower than results from 2007. “As the gFC kicked in and started to bite with shares and property being sold off to recoup further portfolio losses, values across this same set of premium suburbs fell by 7.4% compared with a 2.5% fall in home values,” lawless said. the analysis confirmed that despite stronger capital gains in 2009, the sales are still yet to reach those of 2007. in 2009 the number of sales was down 25% compared to 2007. Yet the most expensive 20% of Australia’s suburbs increased in value 19.8% while the general housing market recorded a gain of only 13.7% in 2007. Although when it comes to top performing premium sales the figures haven’t changed much in the last five years within the top selling suburbs. Mosman in sydney takes the top spot for most
2 3 4 5
Realise the full potential of an SMSF with advice from Dixon Advisory
Dixon Advisory is Australia’s leading independently owned ﬁnancial advisory ﬁrm. We help more than 15,000 families with their ﬁnances including over 3,200 with SMSFs with combined assets of over $3 billion. To help you realise the full potential SMSFs offer, and maximise the performance of your super, we also offer holistic advice on investments, ﬁnancial strategies, estate planning, wealth protection and property investment. CONTACT US TODAY FOR FREE SMSF SET UP OR TRANSFER To ﬁnd out how we can help you maximise the performance of your super, contact us today. Call 1300 578 612, or email email@example.com SAVE $990 WITH FREE SMSF SET UP OR TRANSFER Open an SMSF or transfer your existing fund before 30 June FREE.
houses above $1 million. in 2009 there were 271 house sales priced at or above $1 million equaling 91% of all house sales in the suburb. the top 20 suburbs featured Melbourne and sydney equally dominant with two Perth suburbs also making the list. the inner city suburbs of Melbourne of sydney have recorded the most $1 millionplus sales in 2009. For top end buyers, there are still plenty of opportunities. lawless said investors should remain cautious because premium properties have the tendency to bring in low rental yields and cash flow could become as issue. “For those that can afford the price tag, premium property markets have generally provided stronger capital gains than the broader market place thanks to inherently tight supply on inner city, coastal and character properties,” lawless said. As the property market is gaining confidence official interest rates increased for the fifth time within the past seven months. this increase will add around $50 to the monthly repayments on a $350,000 mortgage. the reserve bank is hoping the latest rise will simmer down the Australian housing market where the value has risen 12.7% across the capital cities in the 12 months to February 2010. Almost 60,000 advertised properties were listed for sale last month, the highest for the last 12 months. interest rates are likely to have a dampening effect on the overperforming markets, as well as underperforming cities like Perth, hobart, brisbane and Adelaide. last month there were more than 88,400 rental properties being advertised across Australia; 6% higher than the previous month.
Daryl Dixon & Max Walsh CHAIRMEN
Dixon Advisory & Superannuation Services Ltd | AFSL 231143 | ABN 54 103 071 665