Bruce Brammall: The good, bad and down-right ugly of tapping your superannuation to buy an investment property

Sometimes — no matter how bad you want something, or how hard you work to get it — it’s just not going to happen for you. Sad, but life’s unfair like that. I wanted to play cricket for Australia. I put in the work. Until age 14. But got taken over in the talent stakes. Truthfully, they zoomed past. Most people set realistic goals. But it will be a stretch and require serious effort. Most will still fail like a New Year’s resolution. Property ownership is a common example. Most people want to get into real estate, whether it’s a home or investment. They’ll save hard, work extra shifts and make sacrifices to get there. The sense of achievement when you move in makes it worth it. But many get into their 40s and feel like the opportunity has passed them by. Some never let go of the dream, leaving themselves open to the slick, who prey on those emotions for profit. And those vultures are good. Damn good. That dream for many, in those circumstances, can become a nightmare. Super property offers Have you been targeted with social media ads saying you can buy an investment property if you have a combined $250,000 or more in superannuation? “Combine your super funds, open a self-managed super fund and you too can benefit from incredible returns offered by property.” Don’t get me wrong. I love SMSFs. And I love property. And it is, indeed, possible to combine the two of them to create great returns for your retirement. But too often — usually with very clear commonalities — it becomes an unmitigated disaster. It can wipe out your entire super balance, effectively donated to those who got you into this mess. I see it regularly. Let’s go through an example. About 12 years ago, a young couple were targeted by a WA-based financial planning firm, with a sales pitch like the one above. They opened the SMSF and bought a one-bedroom off-the-plan apartment in an inner-Melbourne suburb. They paid a little over $400,000 for it. While the place generally rented fairly easily, it never increased in value. Following their recent separation and divorce, the property was sold . . . for about $90,000 less than they paid for it. Multiple disaster fronts The property was negatively geared the entire time, meaning they were losing money on a cash basis for the whole 10 years, largely because the rent never really increased much. These are serious risks — stagnant rent and negative growth — when you buy in an area where lots of apartment buildings are being constructed. The new building that goes up a few years after yours was completed means you are now competing with another 100 landlords who are getting to offer brand-new apartments against yours, which is now a few years old. Times five or 10 new developments over a decade. They paid an inflated price for the property. This happens all too regularly when you buy from a developer, because they set the price, not the market. When they eventually sold their dime-a-dozen property, they were selling into a depressed market. It is reasonably easy to roughly work out what the wife should have had in super had she “avoided” this opportunity. Her super fund balance, had the SMSF never been opened, would most likely have been hovering either side of $250,000. After the sale, when she rolled out of the SMSF back to a regular super fund, her balance was around $40,000. Hard to rebuild from there. Steer clear Look, I get it. Australia needs property developers to build new stock to house an ever-growing population. And developers, in total, need to be profitable. They are a necessary . . . um, “evil” sounds a bit harsh, but that’s sort of about right. The client story above is far from unique. I see it frequently. Which leads me to say this: the single greatest danger to a newbie SMSF trustee/member is the slick promises made about property returns that involve buying a newly developed property. I’ve seen a lot of good stories about property and SMSFs. Just none that involve one-stop-shops linked to property developers. I’ve been watching this space for nearly two decades. Property can be a powerful way to create wealth. Inside, or outside, super. But bad property purchases will destroy you and your super. And most first-timers will not know good property from bad, but are susceptible to smooth-talking salespeople. Tread carefully. Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and a mortgage broker. bruce@brucebrammallfinancial.com.au