Barefoot Investor: For this super fund couple, buying an investment property is not the way to go

FOR this super fund couple, buying an investment property is not the way to go, says Barefoot Investor Scott Pape.

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MY husband and I are 53 and 55, respectively, and we have an SMSF with a balance of $120,000, with plans to add $100,000 this year. My question is: what are the pros and cons of buying an investment property within the SMSF? It’s all rather confusing — capital gains tax, the administrative responsibility of an SMSF as we get older … and can we live in it once retired?

Jill and Steve

BAREFOOT SAYS: Let’s first deal with the cons:

1) No, you can’t live in it once you retire.

2) You don’t have enough money to have a selfie (SMSF) — it’ll be too expensive.

3) You’re right, administering it is a pain.

4) And so is managing an investment property when you’re retired.

5) Rental income isn’t as good as tax-free dividends from shares in retirement.

6) You’ll be putting all your investment eggs in one basket.

7) The banks will likely charge you a higher rate on your borrowings.

8) You’re getting into debt when you’re retiring.

9) Property is horrendously overvalued in most parts of the country.

10) I’ve noticed that shifty salespeople seem to be attracted to flogging property in SMSFs.

Now the pros:

1) Unlike shares, you get to invest in something you can touch and see!

Add it all up and my advice is ... don’t do it! Stick to a low-cost non-SMSF super fund — like an industry fund or ING’s Living Super. Then focus on shovelling as many pretax dollars into your super as you possibly can while you’re working ($70,000 per year between the two of you). If you want a good property asset, don’t buy a low-yielding property like a flat. Instead look at investing in listed property trusts — like the Bunnings-backed BWP Trust (BWP) or the Coles-backed Hotel Property Investments (HPI). They’re actually a little high-priced for my liking right now, though probably not nearly as expensive as the joint you could be about to be flogged.

 

DOING IT TOUGH FOR THE KIDS

I am angry. I’m a 45-year-old single mum of three kids, and I’m trapped by a mortgage ($450 per week) and expenses ($800 per week) on an income of $1180 per week. Every cent I earn is allocated! I am reading your book, The Barefoot Investor, but can’t see how I can find anything to spare for Mojo or goals. Should I keep my house or sell (at a loss) and invest?

Cindy

 BAREFOOT SAYS: You sound exhausted, and with good reason — on the figures you’ve provided, you’re going backwards.

Let me be brutal: you need to cut your expenses (there’s got to be some fat there) and increase your income. Yes, that’s easy for a dude like me to say, and incredibly hard for you to do. Selling your home at a loss should be a last resort.

On one income, with three kids, you need a financial safety net. You need to start building up a Mojo fund, and I also want you to call your super fund and make sure you’ve got adequate levels of income protection insurance (make sure you check how long you’re covered for in the event of a claim) and life insurance.

 

MORE QUESTIONS NOT THE ANSWER

I’m 58 years old. Recently I was checking out my super and found that a large amount was invested in fixed deposits. I asked my “adviser” if I should change the mix, as interest rates are so low at the moment. He responded with a questionnaire from an outfit called FinaMetrica — which I completed and now feel totally bamboozled by. Why didn’t I get a simple answer to a simple question? Melissa

 BAREFOOT SAYS: He’s just covering himself.

If he changes your asset allocation towards more growth-oriented investments like shares, and you freak out and sue him, his daughter will lose her pony.

Still, making you fill out a survey, instead of having a conversation with you, is a little Rain Man. Perhaps it’s time to find an adviser who’s more like a teacher than a compliance officer.

Think of it this way: the share market is the best way to protect your purchasing power in the years to come, but it’s also very risky in the short term. So it’s a good idea to get into shares — but only as long as you have a number of years of living expenses in cash and fixed interest, so you can ride out the inevitable downturns. Only you can decide how many years you need, though I’d suggest three at the absolute minimum.

 

HOLD ON TO THE SUPER

I’m 35, working, and living week to week. Should I cash in my superannuation to repay a personal loan and some money my mother lent me? This would get me out of debt completely. Casey

 BAREFOOT SAYS: No, you shouldn’t.

 

PRIDE COMES WITH THE SAVINGS

Two years ago, newly single, I wrote to you wondering if I should buy a property with hardly any savings. You challenged me instead to build my own sense of security through saving $60k over two years. I’m delighted to say I’ve hit $55k — and the sense of empowerment is worth millions. Thank you for helping me see that money is just an extension of doing the right thing by me — and my future. Emily

 BAREFOOT SAYS: It takes guts to hold off when everyone else is borrowing and buying.

It takes determination to spend less than you earn so you can pile up your savings.

That’s why so few people ever get around to do it.

Welcome to the world of Barefoot. You rock!

Originally published as Barefoot Investor: For this super fund couple, buying an investment property is not the way to go