Despite rising property prices, many DIY superannuation investors who borrowed money from their super funds to purchase properties are now facing losses as high as 75 percent. The question is, as property prices rise and interest rates stay low, why are these investors seeing such a drop?
Buying for Incentives
According to The Sydney Morning Herald, these losses are the result of paying more than market value because sellers offered buyers special incentives to purchase – such as guaranteed income from tenants already in place. According from a recent report by the Financial System Inquiry, as many as 3000 property buyers a month are borrowing from their DIY super funds in order to make purchases.
Neil Kendall, managing director of Financial Rescue, a company who works to help repair financial damage done by poor advice, says these investors were sold promises that just didn’t come true. Now, these ill-informed investors are looking at huge amounts of negative equity caused by paying over market value.
“All those special offers that come with the properties are not free,” Kendall says. “Developers are not charities, they operate on big margins. They need to cover the cost of things like rental guarantees from somewhere – and that somewhere is in the profit margins in the price.”
Poor Financial Advice
As reported by The Sydney Morning Herald, a survey by investment watchdog the Australian Securities and Investments Commission (ASIC) reported borrowing against DIY super funds is most often a result of poor financial advice.
A recent look at the files of over 100 investors found much of the poor financial advice involved using SMSFs to purchase properties. It was reported that only 29 percent of the advice was rated “good” or “fair”. The remaining 71 percent of professional financial advice was rated as unacceptable or poor. So, why are the very agents investors should be able to trust leading them so far off?
Who’s Steering Investors Wrong?
Investors are getting poor advice from the people they are taught to trust – their financial advisors and agents. But those same agents and advisors are getting huge commissions – between 10 percent and 20 percent of the (inflated) purchase price. These (and other bonuses) are added to an already over market price.
What Can You Learn?
There is, however, merit to using your SMSF to purchase property, especially in being able to diversify your asset allocation. The issue brought to light with the recent commentary is that the advice being given to investors is from real estate agents and financial planners who are being paid commissions by the developers of off-the-plan projects. Therefore, their vested interest lies with the product and not the consumer. It is a scenario fraught with danger. The same principals apply to purchasing a property whether it is inside or outside an SMSF structure. The asset is the vehicle to making money, not the structure the asset is purchased through. Performance Property Advisory would never take commissions from a developer, or recommend purchasing a property off-the-plan for the very reason that these aforementioned have unfortunately been subjected to. The margins priced into the properties are most often negatively affecting the bank valuations when it is time for settlement, and that shortfall comes at an upfront cost to the investor.
The best thing an investor can do before they make a decision on purchasing within an SMSF is to speak to an expert who is suitably educated and experienced in the assessment and acquisition of property, and who works for the buyer – not the seller. As this is your retirement at stake, one of your primary objectives should be to acquire low-risk assets that will perform in-line with your expectations so you can reach your retirement goals. It is imperative that you get quality advice and buy the right property to provide for your retirement. Enquire with us today for a free consultation to discuss your investing goals.