It’s an exciting time to be involved in Super. It wasn’t long ago that managing your own Super fund was unheard of. Now the government has loosened up policies on lending within Super and Australians love affair with property looks set to continue well into our twilight years.
It’s essential that you know the characteristics of an asset before you find a place for it within your Super fund though. Each asset class carries it’s own risks and property is no exception.
1. Asset Allocation Risk
The costs of entering the property market can be considered quite high when compared to equities. For many of us the outlay of the deposit and stamp duty alone may swallow the majority of our fund and put us at risk of having all our “eggs in one basket”.
Like the sharemarket however, the property market can and will change over time. What may seem like a solid investment today may experience an “unforeseeable circumstance” in the future that could lead to unwanted expenses or a fall in value.
In this event it is essential that your financial position does not rely on the outcome of a single asset and you have other asset classes to rely upon while weathering any of these unexpected financial storms.
2. Loan Repayment Periods
Ideally we would all like to step into retirement debt-free. Once in Pension Phase there is very little tax advantage in carrying debt and the more tax-free income you have being generated the better your lifestyle can be.
With this in mind, it’s important to consider the repayment period when borrowing for a property and when that period is due to end.
A timeline model can be found here that shows 20 and 30 year markers indicating where your loan repayments may finish depending on the age in which you undertook the loan.
Given the typical repayment period is between 20 to 30 years, ideally you would purchase your property within Super before the age of 45 to ensure you had fully repaid your mortgage by retirement at 65.
If you chose to purchase in the yellow “cautionary” period, ideally you should have strategies in place to pay down your mortgage faster or contribute more in lump sum payments so you enter retirement debt-free.
The red period – after age 65 – leaves little opportunity to repay any of the mortgage and may only become a consideration if you were thinking of leaving the asset as a legacy for family.
3. Minimum Withdrawal Risk in Pension Phase
Where equities are made up of a multitude of small and highly liquid assets that can be sold quickly if needed, property is a much more cumbersome asset that can easily tie up the majority of a portfolio. If you decided to sell it may take weeks or even months to liquidate the asset.
This is an important consideration when looking at property in Super as legislation requires Super beneficiaries to withdraw a minimum of 4% of the portfolio’s fund each year.
If the majority of the fund is left holding a property with very little liquidity left to pay out a pension at the required rate then you could be forced to sell the property to meet these payments and sacrifice any growth that asset may be experiencing.
4. Property as a long-term investment
This is one of the largest considerations that will need to be addressed if you’re looking to invest in property responsibly with your Super fund, regardless of whether you have the ability to pay down the debt quickly or not.
Well located, median-priced property will ideally double in value every 10 years or so. Like any market though, property growth has it’s peaks and troughs – some years it may grow strongly and others it may remain stagnant.
For this reason alone you should aim to be in the market for at least a 10-year period to take full advantage of the growth of the asset. Any less may lead to disappointing results.
Like any investment decision, each of these considerations will vary depending on your own circumstances. You may not choose to retire until much later, or you may have the ability to pay down the debt much faster and take full advantage of the rental income.
Either way, it pays to take the life of the investment into account as well as the size of the outlay that is required to invest in property responsibly and safely. Managing factors such as these can lead to a lucrative property portfolio that bears fruit for years to come.
