Self Managed Super Funds (“SMSF”) are now allowed to borrow to fund property purchases. As a result there has been a rush by some investors to set up their own SMSF and buy a property off the plan. In many cases this is a positive development.
However, let me tell you a story that is all too common. The specific details of this story are fictional but the issue is very real.
George and Mary went to see their financial adviser, Bill. Bill suggested that they buy an apartment, George and Mary didn’t think they could afford it – but Bill sugegsted that they buy an apartment with their Super, save lots of stamp duty and Bill offered to help them do it.
George and Mary agreed thinking that with Bill’s help they were set to join those making a fortune from investment properties. They didn’t mind that it cost $10,000.00 to set up the SMSF, set up another company and trust to own the property and Bill very helpfully selected a couple of nice looking new apartments for them to choose from.
George and Mary selected one of the apartments at a price of $500,000.
When it came time to settle Bill arranged a 70% loan and the balance of 30% (plus fees) accounted for most of the balance of George and Mary’s super fund.
However, I suspect that George and Mary would be upset if they understood how much Bill had received for his wonderful advice – fees for setting up the SMSF, as much as $40,000 commission from the developer who sold the property and various fees and commissions for arranging the loan. They will be more upset if, as is likely, the property is worth less than they paid for it in three years time.
I am not suggesting that all or even most advisers are motivated solely by fees or that property in a super fund is a bad idea. However, some investments seem to be motivated by the large commissions on offer to the advisers.
Do your due diligence and make sure that you are buying an investment that will help fund your retirement – not just that of your advisers.