A specialist fund manager has highlighted certain significant issues of which SMSF members should be aware before they make the commitment to include an investment property in their fund portfolios.
Specifically, CFMG Capital general manager Andrew Thomson warned trustees use of a limited recourse borrowing arrangement to acquire an SMSF property could have consequences for the financial standing of the individuals involved outside of the superannuation environment.
“[This type of strategy] can actually affect your borrowing capacity outside your super fund, which is a little known fact,” Thomson told attendees of the recent SMSF Trustee Empowerment Day 2023 hosted by smstrusteenews.
Further, he noted servicing the debt can also present issues if a combination of rental income and employer contributions is having to be used to do so.
In addition, he pointed out holding an investment property inside an SMSF has weaknesses from a portfolio diversification perspective.
“A key metric of any self-managed super fund is diversification so limiting yourself to one asset class, and in some cases one single asset, can come with some pretty hefty consequences if you get it wrong,” he said.
According to Thomson, these issues can be avoided if an SMSF invests in property via a managed fund.
“Investing in property this way has lower capital requirements, gives you that ability to diversify, it’s very passive and there are liquid and illiquid opportunities,” he noted.
“You can invest in all of the different property asset classes by using managed funds. You can have exposure to listed REITs (real estate investment trusts), you can take advantage of land syndication opportunities and unlisted managed investment schemes.
“For example, CFMG Capital gives you the ability to invest in residential property without purchasing an individual asset.”
However, he recognised holding an investment property inside an SMSF is still a worthwhile strategy, but trustees should have a degree of knowledge about the sector if they should choose to do so.
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