31 March 2012

At Whites IFM we tend to argue against including property in your Self Managed Superannuation Fund in most circumstances. According to a 2009  survey by the Australian Taxation Office,  the typical SMSF  has one or two members and an average  balance of $450,000 per member. These members commonly own their own home and have some other assets outside of super. By way of example, assume a couple owns their own home valued at  $750,000, has a SMSF with a combined balance of $925,000 and has a further $200,000 in investments outside of super. Their total net worth (assuming all assets are debt free) is $$1,875,000. Their home accounts for 40% of this couple’s net wealth.

Many people ignore the value of their home in calculating net worth however this can be misleading. It is increasing common for retirees to downsize their homes when their children have moved on and a smaller property, or perhaps a sea change, is desirable. The amount of money freed up by downsizing can usually be contributed to the SMSF in a tax efficient manner. Alternatively, some retirees prefer to stay where they are and look at reverse mortgages or other methods of extracting some equity from their homes. In either case, the amount of money released from their homes is directly related to the performance of the property market – in other words these investors’ homes represent a real exposure to the property sector.

In the above example, having 40% exposure to one investment sector is usually quite sufficient. Investors who also own beach houses, commercial or other investment properties can have well over 50% of their net worth exposed directly to the property sector. For these reasons we tend to suggest that SMSFs should not be invested in property but rather hold equities, cash and interest rate securities as a way of diversifying their investment portfolios. There can be exceptions to this rule  – one of which is business premises. While we do not necessarily recommend that you look to include business premises in your SMSF, there are times when it is worth investigating further. This related article in The Weekend Australian looks at the pros and cons of SMSF investment in business premises – worth a read for those interested in this topic.