Buying property within a Self-Managed Superannuation Fund (SMSF) can be an excellent way to secure your financial future. However, making the right choice of property is critical. Land-and-house packages and off-the-plan units, while alluring with their promise of modernity and convenience, often fail to meet the fundamental needs of a strong, long-term investment. These types of properties can put your retirement savings at risk in ways that may not be immediately apparent.
Let’s explore why these properties are often problematic and why established properties are generally a better option and uncover the hidden traps that make these deals a minefield for unwary investors.
Why Established Properties Often Outperform New Builds
The appeal of a brand-new property is undeniable. It’s fresh, modern, and comes with features designed to attract tenants. However, when it comes to investment, shiny and new doesn’t necessarily mean profitable or stable.
1. Overvaluation and Lack of Immediate Growth
One of the biggest traps of buying new is overpaying. Developers sell new properties at a premium, which includes not only the costs of land and construction but also marketing expenses, developer profits and often hidden kickbacks to those selling the properties (more on that later).
As a result, new properties rarely appreciate immediately after purchase. Instead, they often experience a decline in value, sometimes called “settlement shock”, because the price was artificially inflated from the start. This is especially problematic within an SMSF, where every dollar must work hard to generate returns.
In contrast, established properties are typically priced based on actual market conditions, with less risk of inflated values. They also offer a historical track record of performance, giving you more confidence in their future growth potential.
2. Market Demand vs. Promised Potential
New developments are often located in emerging suburbs or urban fringes, where infrastructure, amenities, and population growth are still works in progress. Developers market these areas with promises of future growth, but the reality can take years or may never materialise as expected.
Established properties, by contrast, are found in proven locations with existing demand. Tenants and buyers are drawn to these areas because of their proximity to schools, transport, shopping, and other essential services. This translates to lower vacancy rates and stronger capital growth.
3. Depreciation Benefits: Overhyped for SMSFs
One of the selling points of new builds is the tax depreciation benefits. While these can reduce taxable income for investors holding properties in their personal name, their value is often overstated for SMSFs.
SMSFs focus on long-term wealth accumulation through rental income and capital growth, not short-term tax offsets. Additionally, depreciation benefits do nothing to offset the risks of overpaying or low tenant demand.
Beware of Rental Guarantees: A Dangerous Sign
When buying new builds or off-the-plan properties, rental guarantees are often used as a sweetener to lure investors. At first glance, they seem like a win-win. You’re promised steady rental income regardless of market conditions. But these guarantees are often a major red flag.
Why Rental Guarantees Are a Problem
You’re Paying for It
Developers rarely give rental guarantees out of generosity. Instead, the cost of the guarantee is baked into the property’s purchase price. This means you’re effectively funding your own “guarantee” by overpaying for the property, and this inflated price can make it harder to achieve meaningful capital growth. Here’s how buyers still end up overpaying even when there’s no competition. Here’s how buyers still end up overpaying even when there’s no competition.
Short-Term Promises, Long-Term Risks
Rental guarantees typically last only one or two years. After that, you’re left dealing with the real rental market, which may not be as robust as promised. If the area has weak demand or an oversupply of properties, you could face extended vacancy periods or rental income far below expectations.
Hiding Oversupply Issues
Rental guarantees are often used to mask problems such as market oversupply or poor location choices. In strong markets with genuine rental demand, guarantees wouldn’t be necessary.
Do Your Research: The Hidden Vacancy Problem
Before falling for the lure of a rental guarantee, take a hard look at the local market:
- Vacancy Rates: How many units or homes are sitting empty in the area? An oversupply of similar properties indicates weak tenant demand.
- Older Developments: Look at properties sold off-the-plan in the same area five or ten years ago. How have their values performed? You might be surprised to find that many have depreciated rather than appreciated.
Investing in an area with a high vacancy rate or oversupply creates long-term risks that a short-term rental guarantee cannot fix.
The Property Spruikers: Who Are They and Why Should You Be Cautious?
If you’ve been approached by someone promoting new builds or off-the-plan units as “ideal” investments, chances are you’ve encountered a property spruiker.
What Is a Property Spruiker?
A property spruiker is someone who markets properties, often on behalf of developers or builders, under the guise of investment advice. They may present themselves as consultants or advisors but are primarily motivated by sales commissions and developer incentives.
Why Their Kickbacks Are a Problem
Conflict of Interest
Spruikers are not working in your best interests. They’re working for the developers who pay their commissions. This conflict of interest means they’re likely to steer you toward properties that benefit them financially, not properties that align with your financial goals.
You’re Still Paying
While you may not pay the spruiker directly, their commission is factored into the property’s price, inflating it beyond its true market value.
Misleading Data
Spruikers often present selective or manipulated data to make their properties seem like excellent investments. They might focus on citywide trends while ignoring local oversupply issues or use overly optimistic rental projections that don’t reflect real conditions.
The Unique Risks of SMSFs with New Properties
For SMSF investors, the risks of buying new properties are even greater. SMSFs have specific rules and limitations that make poor investments particularly costly:
- Limited Borrowing Capacity: SMSFs can only borrow up to a certain percentage of a property’s value. Overpaying for a property locks up more of your fund’s capital and restricts your ability to diversify or make other investments.
- No Access to Equity: Unlike personal property investments, SMSFs cannot tap into equity to fund further purchases. If your SMSF property underperforms, you’re stuck with it.
- Focus on Long-Term Goals: SMSF investments should prioritise reliable rental income and capital growth over speculative tax benefits or flashy incentives.
If you’re still weighing up whether SMSF property investment is right for you, this article on how much money you need to buy property with your SMSF can help clarify the financial groundwork.
How to Avoid These Traps and Invest Smarter
- Choose Independent Advisors: Work with professionals who are not tied to developers or builders. Look for advisors who are transparent about fees and who prioritise your financial goals over commissions.
- Focus on Established Properties: Prioritise properties in established suburbs with strong demand, proven growth potential, and existing infrastructure.
- Do Your Own Research: Don’t rely solely on the data provided by sellers. Investigate local vacancy rates, historical growth, and the performance of similar properties in the area.
- Question the Sales Pitch: If an offer seems too good to be true—rental guarantees, glowing projections, and slick marketing—it likely is.
Final Thoughts
Investing in property through your SMSF can be a powerful strategy for building long-term wealth, but it requires careful planning and due diligence. New builds and off-the-plan properties may look appealing, but they often come with hidden risks that can jeopardise your retirement savings.
By focusing on established properties, working with independent advisors, and digging deeper into the data, you can avoid the pitfalls of overvalued assets and conflict-driven advice. Remember, your SMSF is your financial future. Make sure every decision puts your interests first, not someone else’s commission.
