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Media Release |
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Self Managed Super Funds - Property Investors Warned on Lemons
Thursday, 28 October 2010 16:14
'Property Lemons' could threaten the investment portfolios of Self Managed Super Funds (SMSF) if investors did not undertake due diligence on the condition of the property with an independent professional inspection prior to purchase.
 An Archicentre architect conducting a property inspection for an investor. |
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Archicentre, the building advisory service of the Australian Institute of Architects said the major tax breaks to superannuation funds is fuelling self managed super funds investment in property.
According to the Australian Taxation Office at 30 June 2010, there were more than 428,000 DIY super funds in Australia with more than 815,000 members and a collective $391 billion in assets.
Following recent amendments to the superannuation tax laws property investors may be able to borrow using their self managed super funds to invest in direct property - residential or commercial property. The SMSF would pay 15% tax for the investment earnings likely generated by the fund. Once the investor is in retirement phase and drawing a pension from the fund the rent would be tax-free from the property.
David Hallett, Victorian State Manager of Archicentre said, "around 70% of people who purchase property in Australia fail to undertake due diligence on the condition of the property usually finding faults when they rent out the property or take up residence themselves".
"In the case of self managed super funds, people are responsible for their own due diligence, and a property inspection by an independent professional person with appropriate skills, is a very basic protection for the financial position of their fund."
Archicentre's national pre-purchase property inspection statistics reveal that 35% of all homes sold have some form of borer, termite, dry rot, or timber fungus problem.
Mr Hallett said that in the case of the self managed super funds, aimed at building a retirement fund, many investors could find their returns badly eroded through the purchase of a LEMON property with expensive faults ranging from structural problems, faulty wiring, plumbing, illegal building or termites.
"Costs to repair such faults can run into tens of thousands of dollars and obviously threaten the returns of the superannuation fund".
"If the property has been purchased to rent out the investor could find themselves with immediate costs. In the case of a commercial property this could mean the loss of substantial rent whilst the property is repaired and brought up to standard to comply with health and safety standards."
Mr Hallett said, "in the case of commercial and industrial properties, especially older premises inspected by Archicentre for pre-purchase reports or renovation, problems can range from structural problems through to outdated or poorly maintained services of power, water and air-conditioning, leaving the building non-compliant with current health and safety requirements."
In the current economic climate of predicted rising interest rates and property prices, the margin for making a mistake on buying a LEMON as a superannuation investment has narrowed considerably and purchasing without a thorough property inspection could have a major impact on the super fund's performance.
Often the decision not to carry out an inspection can make a major financial and social impact on buyers who in some cases run into serious debt problems with unbudgeted repairs or maintenance being added to the mortgage compounding the affordability problem with a $30,000 repair cost turning into $50,000 over the life of a normal loan.
The following list of Lemon Buster cover ups and estimated costs to repair are based on the findings of Archicentre architects conducting pre-purchase housing inspections across Australia and the Archicentre Cost Guide.
Archicentre Top Ten Cover Ups
1. Illegal building. Up to $100,000.
2. Cracking up to $50,000.
Average $3,000. Internal walls patched and painted, external walls concealed behind plants or trellis.
3. Damp up to $50,000 and $5,000 average.
Walls painted or furniture placed against damaged walls.
4. Termites, borers, and timber rot up to $20,000.
Average $5,000. Floor damage patched and concealed under carpets.
5. Roof problems up to $20,000.
Rusty metal roofs painted, tile roofs patched with lead. Damaged roof framing propped up in roof space.
6. Rotten weatherboards and windows up to $10,000.
Rot patched with filler or covered with tin and painted.
7. Rotten sub-floor or stumps $8,000 average.
Floors temporarily propped to prevent bouncing.
8. Faulty or illegal wiring $6,000 average to repair.
9. Faulty or illegal plumbing $6,000 average to repair
10. Guttering and downpipes $3,000 average.
Rusty gutters patched and painted.
Media Enquiries:
Ron Smith, Corporate Media Communications, Archicentre (03) 9818 5700 Mobile: 0417 329 201