Creating an SMSF portfolio of property: Forrester Cohen on entry strategy

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Every property investor wants to buy well, so they can eventually sell well. But identifying a property that will deliver strong yield and solid capital gains over the long term is not always easy. 

Rental growth has been stagnant in some areas, while capital gains on individual properties are never assured, even in cities where the overall trend has been for price growth. 

Finding a property that will produce a positive result requires in depth research and consideration whether investors are buying directly or through a self-managed superannuation fund.

Investors who buy property through an SMSF typically plan to hold for the long term. The fund should have an investment strategy that documents its goals for holding investment property. This should consider diversification and liquidity requirements. Properties are high value assets making it difficult for a fund to be diversified unless the balance is large. They are also illiquid, meaning they can’t quickly be sold for cash.  

There are restrictions on the types of improvements SMSFs can make to properties they own if they borrow the money, particularly if the fund has borrowed to buy the investment. This means capital growth and rental income, rather than profits from developing or renovating and on-selling a property, will drive investment returns for the fund. 

SMSFs can buy most types of residential new and established property as long as the property is not purchased from anyone related to the fund members. Commercial property can be bought from related parties as long as the transaction meets regulatory conditions such as being sold at market value. 

Where to Buy

Location, price point and the property’s attributes are some obvious features to consider when searching for residential investment property.  Looking at these from a home owners’ point of view gives little depth to the considerations of what will drive the profits.  

There are various schools of thought on the best locations for an investment property. Some commentators advocate buying apartments in inner city areas, while others favour properties in middle and outer ring suburbs, or in regional locations. Schools of thought promote property commentary or opinion and these are real estate skills. It is much better to look to advice that presents and analyses the facts to support informed decision-making.

It can be difficult to predict the capital gains prospects of an area but some factors that influence growth potential include demand as measured by population growth or days on the market, supply as measured by dwelling starts and infrastructure that attracts a regional focus or increases accessibility to regional amenities and employment.

Suburbs where the growth in demand is outstripping the supply of new properties are more likely to experience capital growth than areas where supply and demand are in balance, or where an oversupply is emerging.  

Rental growth and the yield the investment property delivers will be affected by factors such as the appeal of the area, its life style amenities and commute times to employment and educational centres. Rental vacancy rates that reflect the current appeal, can be trended to support in depth understanding.

Timing

Property markets tend to move in cycles where prices rise fairly strongly, then plateau or decline before picking up again.  

Buying into an area where prices have already achieved significant capital gains may not offer the same growth potential as nearby suburbs that have not boomed as strongly. 

Timing entry into any investment is complex and holding for the long term can minimise the risk of a capital loss.  Trended capital growth rates versus days on the market can give much stronger support for informed decision making.

Be wary of areas that are dependent on single industries for their economic success. Mining towns for instance, delivered incredible rates of capital growth during the boom but their prospects are very limited now that investment in the resources sector has slowed. 

What

When considering individual properties look at the demographics of the area and favour the properties that will appeal to the broadest range of tenants for rental and to home owners for your exit.