Miranda Brownlee writes an article for the website Mortgage Business wherein she reflects expert market sentiment, suggesting that residential investments through SMSF can turn out to be a lucky guess. Moreover, those investors with less than $4 million in their kitty should refrain from making investments in this asset class.
Allocation of property investment in SMSF
SMSF trustees having a $1 million fund to show may be unnecessarily risking their portfolio’s diversification potential by investing in residential property, feels CommSec, Australia’s biggest discount stockbroking firm.
Why you must have $4 million or more to invest in property
The line of reasoning is simple. Properties should not have more than 15%-20% of allocation of the entire SMSF portfolio. Now, those funds which have $4 million or more can afford to put in up till $800,000 in property and this can mean a decent purchase. However, funds with $1 million in their kitty cannot purchase properties worth more than $200,000 unless they wish to defy the logic of SMSF investments. You can’t possibly get anything substantial for $200,000, can you?
Further, a property bought as a single asset in SMSF can really resemble pot luck. It can go well if purchased in cities exhibiting value growth (Melbourne or Sydney for example) and go bust if you dig into cities like Hobart or Darwin. Investments made in cities like Brisbane can go either way.
You can read the original article here.
Percentage of allocation is important
Allocation is crucial. No questions about that! Property is an illiquid asset. It may not be wise to put a large chunk of your SMSF kitty into it. 15%-20% is still okay but whether you can fetch high ROI may depend altogether on the kind of capital growth expected. And what then about the diametrically opposite camp of investors who, while investing in property, seek high rental yield to maintain a positive cash flow? For them, compressing yields across capital cities can’t certainly be good news.