SMSF trustees should rethink investments in residential property to avoid major cash-flow problems, a wealth management expert has recommended.
“People in retirement should be focusing on income over the medium term with enough capital growth to maintain income levels in the longer term,” HLB Mann Judd wealth management partner Michael Hutton said.
“The basic fact is that residential property investment, particularly when the market is close to a peak as it must be now, has to be a long-term strategy to get the capital gains sought.”
The rental yield on residential investment properties could often be very low, particularly after expenses had been taken into account, Hutton said.
This could create difficulty in accessing funds as they were needed, resulting in potential cash-flow problems for trustees, he said.
“Where gearing is involved, major cash-flow problems can occur – particularly for those drawing a pension from their fund or expecting to draw a pension within the next several years.”
Negative gearing tax provisions were a major attraction of property investment, yet anyone interested in investing in property, even younger trustees, should carefully consider whether holding residential property in an SMSF, rather than in their own name, was best for them, Hutton said.
“Anyone still intent on investing in residential property as a way of accumulating wealth through capital gain, which should be the main reason for property investment, must recognise it is a long-term investment and consider their own circumstances,” he warned.
“As we’ve said many times before, SMSF trustees must recognise there are weaknesses in placing a large portion of their retirement savings in one asset.
“Property is usually an illiquid asset, which should be a key consideration for retirees funding their own retirement.”
He said trustees should have access to liquid assets within their SMSF portfolio to provide them with access to cash, as needed, in their retirement.
“If they don’t have a mix that includes fairly liquid assets, they may need to sell the residential property owned by their fund, even though they only need a small percentage of its value,” he said.
