- Failing to engage the right advice ‘Team’.
The two biggest issues we are seeing in this regard are:
Accepting specialised advice about Superannuation (your retirement nest egg) from a Property Spruiker or ‘garden variety’ Mortgage Broker. Regardless of whether they then put you in touch with their ‘tame’ Financial Planner you need to be smart enough to realise that if the person who has recommended that you establish a SMSF is the same person who will earn a commission because of it – you should run a mile. Putting your retirement savings at risk on the say so of someone who does not have your best interests at heart is nothing short of madness.
Penny pinching and hoping to find free services or the so-called ‘one stop shop’. If you left your Superannuation money in a Retail Fund or Industry Fund you would have average total management fees of between 1% and 2% each year. In other words on a $300K superannuation balance you would be paying $3K to $6K every year. Because you never write a cheque for this amount when it is in a ‘pooled Fund’ a lot of people forget this.
While a reduction in overall cost can be one reason to establish a SMSF you should nonetheless be willing to invest a reasonable amount of money to engage the ‘Team’ to run your SMSF professionally.
Also you should be aware that for a Limited Recourse Borrowing Arrangement (SMSF Loan and associated property purchase) to proceed smoothly there are up to 13 distinct skill sets that your Advice Team needs to bring to the table.
We don’t believe there is a single credible ‘one stop shop’ for this – and even if there was it would almost certainly be conflicted and couldn’t protect your best interests.
N.B. We have chosen to specialise in the provision of SMSF loans and are the only Company in Australia to do so. More importantly we are the only SMSF Mortgage Broker that has chosen to ensure we are free of conflict. We are also skilled and experienced at coordinating your other Advisers to ensure as smooth a process as possible.
- Poor approaches to property selection.There are two distinct errors that we see repeatedly when it comes to property selection:
- Following from Error Number 1, purchasing new (or off the plan) property from ‘Property Spruikers’. While there is nothing inherently wrong with a SMSF investing in a new property – you should be very wary if that property is being marketed by any person or group that claims to be an investment property specialist or ‘educator’. If this is how you’ve come by your intended property – you should take a step back and be prepared to walk away. If that same property salesperson / company also suggested that you establish a SMSF in the first place – or they referred you to their ‘tame’ Financial Adviser for advice – don’t walk – run. This is a major issue – and one that has (thankfully) now found its way onto the Regulators’ radars (APRA and ASIC). An unfortunate, and largely unintended, consequence is that many Lenders will now not lend on new properties and/or to newly established SMSF’s at all. If you are intending to invest in a new property that you have selected in the open market then we can assist. Please note, however, that it is our standard practise – not to assist with a transaction where we have any concerns about the independence or veracity of any property ‘advice’ you’ve received.
- Investing emotionally and/or in your “own back yard”. It is of course possible that the best property investment, in terms of rental yield and capital gain, could turn out to be around the corner from your home. But statistically it is not likely. It is important to recognise that you are really craving the reassurance of a market you know well. Doing broader research, or getting good advice from a trustworthy Property Adviser can get you to the same place of comfort, but with the added benefit of geographical diversification.
N.B. Do not confuse the term ‘Property Adviser’ for the self-styled property expert who is more often than not only an expert ‘seminar host’ or salesperson. There are huge sums at stake here. Do some serious homework before engaging your Property Adviser.
- Exchanging contracts in the wrong name.
You would be surprised how often we see this. Somebody finds a property bargain and exchanges contracts to secure it before thinking “I know, I’ll buy it with my super.” The problems associated with this “shoot, ready, aim” approach vary from State to State, but at best you are looking at having to re-stamp the contract of sale (paying stamp duty twice) if you get this wrong.
The Contract needs to be in the name of the Trustee of the Security Trust (not the SMSF). While it varies between States, the use of “or assign” etc to enter into the Contract in your name (or another name) and assign it to the Security Trustee later will generally not assist from re-stamping or other downstream issues.
- Attending auctions without indicative finance approval.
This is likely to compound the problem above. Not only is the Contract of Sale in the wrong name and we have to scramble to get the finance arranged, but there is also no cooling off period available. You may fluke a timely settlement, but this is invariably stressful and definitely not recommended. The worst case scenario is that your SMSF cannot complete the transaction and you will forfeit your 10% deposit.
- Accepting specialised lending advice from local bank branch staff or mortgage brokers.
The SMSF space is now the largest Superannuation Sector. Therefore, there are numerous new entrants scrambling to “get a piece of the pie”. While SMSF lending is relatively new – every major Aggregator, Lender and the Financial Planners and Mortgage Brokers they have in their pockets has jumped on board.
They may mean well (and you can’t blame any small businessperson from trying to add revenue streams), but a little knowledge is a dangerous thing and some of the worst, intractable conundrums we see have been brought about by inexperienced lending officers or local mortgage brokers making uninformed guesses. Don’t risk it; only take advice from specialists who handle these transactions all the time.
N.B. If you use a local mortgage broker (or bank manager) for your lending needs outside Super you’re still receiving conflicted advice. The result is that you will pay more in interest and fees than you might otherwise pay if you accessed unbiased home loan advice. So, by all means keeping doing that if you choose to. But accessing that same conflicted advice for your SMSF borrowing needs – when it is also almost certainly lacking in technical competence – makes little sense.
SMSF Loans has no interest in disturbing your existing relationships and we do not act on finance other than SMSF Loans anyway. But – for specialised transactions you need specialised help. You wouldn’t let your local GP undertake surgery on your brain – would you?
- Paying too much for advice or documentation.
People paying $6,000 to $8,000 for a lengthy “warrant trust deed” is becoming less frequent, thank heavens. The reason the kind of trust you need is sometimes called “bare” is because it is relatively straightforward. It should be relatively inexpensive too.
Likewise it shouldn’t be costing more than a few thousand dollars for advice on, and assistance with, establishing your SMSF.
You absolutely do need to be paying for quality advice – but if you feel you’re being asked to pay too much please feel free to ask us for a referral.
- Getting into a legal stoush with a lender’s legal review team.
This is one of the most common pitfalls we used to hear about every week – but is thankfully becoming less frequent. Loan documents have been signed and returned and the bank’s legal team conduct a review of the trust documents (both the SMSF trust and the security trust). Someone decides that a particular clause is vague, erroneous or missing altogether and requests your lawyer to get the deed amended. This can signal the start of a long and expensive (think penalty interest per the Contract of Sale plus legal fees) argument between legal experts.
You can avoid this by ensuring the Trust Deed you are using has been tailored to suit the specific Lender. SMSF Loans can assist with your Trust Documentation if required.
- Using a solicitor or conveyancer who is not familiar with this kind of transaction.
This has a nasty way of compounding the problem above but, regardless of that, it is invariably much less stressful to be engaging legal advisers who are experienced in these transactions.
- Using cut price or bundled fund administration services.
This is obviously a generalisation, but we see some services of this kind that restrict SMSF trustees to using particular banks for their cash management account or for their property finance; particular share trading platforms for their equity investments and so on. We pass no comment other than to say that, in this arena as much as any other, you tend to get what you pay for and some of these arrangements appear to shout “kickback!”
- Over-stretching your fund to purchase a property.
This one is entirely human. Who wouldn’t want the highest quality asset for their fund? We stretch ourselves to buy our home or upgrade it. Almost invariably, we are pleased that we did. But this is investment, pure and simple. We must focus on returns and risk management. What if there is no tenant for a few months? What if we can’t make the contributions to the fund to cover a shortfall? Remember, some of the advantages of property investment are meant to be less volatility and stress than other asset classes. Significant levels of negative gearing are likely to prove very stressful at times and (generally) make no sense inside Super. As a general rule, you should aim for borrowing levels versus rental income that makes this a “set and forget” transaction.
General Advice Warning:
The above information is provided in good faith as general advice only.
We provide Credit Advice about SMSF lending products and General Advice with regards to other matters affecting lender credit decisions with regards to limited recourse borrowing arrangements. Other than for credit purposes we do not take into consideration your personal or financial circumstances, needs and objectives and will not provide any recommendations. You should seek independent advice from your accountant and/or financial planner in considering whether borrowing through your SMSF is appropriate to your circumstances, needs and objectives. You must undertake your own enquiries in determining if the structures involved in borrowing through a SMSF meet your requirements with regard to your legal position, investment strategies and taxation.