BE AWARE OF RISKS WHEN BUYING PROPERTY WITH YOUR SUPER FUND
Do you remember the 2007 Global Financial Crisis (GFC)? Share prices and property values plummeted. People lost their homes and life savings. In reality, right now, we have forgotten about the GFC because share prices have increased, and property is booming.
In accordance with law I have to point out that this article is not specific advice but is intended as valuable information, so you are armed with more knowledge.
I need to ask you a simple but significant question – do you think it is possible we could have another GFC? If you said, ‘No’, there’s no need for you to read further. If you said, ‘Yes’, you need to gather as much information about ‘cycles’ as you can – business cycles, share cycles, property cycles and general economic cycles to help you cope when the GFC hits.
If you said, ‘Yes’, you need to ask another two questions – when will the GFC hit and what can I do to prepare for it?
Let’s talk about cycles – and let’s keep it simple because I like simple. If you have been in business for at least twenty years you know that you have times when revenue grows and other times when it falls. You know that there is a boom period and then a period of weakness. For some businesses there is a boom and then, sadly, a bust. So, you are already familiar with cycles – the business cycle.
The economy works the same way – there is a boom and then a weakness and then in some parts of the economy a bust.
Shares and property have a boom and bust period as well.
Remember the 2007 GFC I mentioned above.
These boom and bust cycles repeat. They don’t repeat the same dates or the same length of time, but they do go up and then down, boom and then bust.
If you have knowledge about the cycles you are in a better position to make money and cope when the GFC hits.
The previous property cycles give us general indicators or signposts to watch out for and if history repeats you will be able to make informed decisions.
Now returning to our story about buying residential property in your super fund. Let’s say your super fund had $150,000 in cash and $150,000 in shares – total assets of $300,000. You decide to buy a residential property for $400,000. So, you sell the shares for $150,000 and add that to your cash of $150,000 giving you
$300,000 in cash. To buy the property you are still $100,000 short so you borrow $100,000 and buy the property.
Before selling the shares, your investments were diversified – you had spread the risk between cash and shares. After buying the property you now have all your eggs in one asset basket – property. You are no longer diversified. You have exchanged two different asset classes for one giant lumpy asset.
You have increased your investment risk.
You said earlier that you believed that it was possible to have another GFC. So, what will be the impact on the value of the property? This is another risk to consider.
But what if you sell the property before the GFC hits? The property has increased in value and when you sell all that profit is now converted into cash.
So, the question remains – when will the GFC hit? Before the 2007 GFC hit there were some economists and financial advisers, only a handful mind you, who did predict the 2007 GFC. So, it seems it is possible to know by reading the signposts.
I can’t give enough information in this article to cover the GFC signposts and strategies you should implement to be ready for the GFC due to time and space constraints.
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