Hello, and welcome to The Australian's Money Puzzle podcast. I'm James Kirby. Welcome aboard everybody. Now, a lot of listeners are property investors, and a lot of them would have an idea of having their own superfund and putting property into that fund. It's a backbone basically of active independent investing. There has been for some time. But my guest today, financial advisor James already says buying property inside a super fund is a million dollar mistake.
Hi, James, HELLI James, lovely to chat night.
Good to have you on the show. I don't know what you're going to say, but I imagine that there's no lack of demand. I think people want to put property in super funds. They have for a long time. They've had a success for a long time. But you've done an exercise, a numerical exercise. Basically, you dug deep, You've a made certain assumptions, you tested and tested it, and you have come to the conclusion that it is not worth doing. Just explain briefly why.
Yeah, of course, well please alam it is step back just a moment, because it might be valuable to offer some context, which is that I embarked on this exercise. I'm a financial advisor. I embarked on this exercise open minded to the idea of doing this myself. Our super my superbalancers continue to grow, and I'm now at a point where it's a viable option, and so I thought, you know, I'm going to really run the details, run the numbers in as much detail as I can. And
so that was what motivated me to do that. And when I put those numbers in and I accounted for all the costs that you incur inside of self managed superannuation fund, the thing that stood out to me is that you really need to hit it out of the park in terms of the asset that you buy to have any chance of outperforming your standard high growth superannuation fund that might be available through your industry super fund, for instance, let alone, if you're willing to take more
risk and invest in gear type assets like I am.
When you say i'll perform, you mean do you mean the rental return or the total return? Because obviously you'd have the capital gain, wouldn't you running So I presume you allowed for all that, did you.
Yeah, that's right. Yeah, so the total return. I'm almost forty eight, and I ran the numbers to I see a raygrin on your face there.
But because assurans hell, don't look a remotely like forty.
Look at you, Yes, I assure you, I feel every bit of it. An then some. But when I was looking at this, the question was firstly, from now until fifty five? You know what would be better if I was to sell the asset at fifty five versus just continuing on the trajectory I am right now. And then
similarly I also looked at this, we'll hold up. What about if I hold on till sixty current legislation media condition of release, which means you can access your super and then there are some real tax benefits of selling after that date, even after both of those things, including all the likely returns that we get using long term averages, the likely income we receive again using long term averages. James, it just didn't stuck up.
It just didn't stuck up. It's funny. I thought you would tell me that the issue was reached. That was a part of time SMSF lending was mainstream. I don't know why it's moved so much to the margins, but it has, And so no one pays more. Right, no one pays more. No one pays a higher mortgage ate in Australia than a self managed super fund investor borrowing for property. Explain why that is and is that a key factor?
Yeah, it's an enormous factor. And it's a double wammy too. So this really came about above a loss during the Royal Commission in Banking and Finance, and those conditions going through that process resulted in I presume the major banks, you know, the Big four, all looking at this and saying, hey, in a risk adjusted sense, lending money to superannuation funds
is just dumb. You have this what's called a limited recourse borrowing agreement, which means as the bank, you're not actually able to attack the asset itself as you would with a traditional whether it's an investment property loan or a home loan. So there's less recourse and so as a result, they said, if we were going to play in this space, we'd have to increase rates a lot and a lot of them left. Now, that left a
whole heap of second and thirdtier lenders. You know, for example, commonly right now you might get lending through pepper Money Liberty latrobe to access self meta superannuation funds and old debt, and of course when competition's down then you're not going to get sharp prices. Now, the consequence that we have here is not just that the rates are really high. On average, you'll probably pay somewhere between seventy let's say, two point seventy five and one percent higher than you
would on your home loan rate. But James, it's also the fact that the tax deduction is so much poorer too, because the tax rate inside the superannuation fund is only fifteen percent.
So the negative gearing isn't as good.
Eh, it's nowhere near as powerful. That's rightever it would be.
But wasn't that always the case? Wasn't it?
Certainly? The tax rate absolutely. But if I think back to advising people in the twenty tens, for instance, it was really common for someone to say, I've got a self man and super fund with a property inside it, and I'm paying three point five percent. There was a little period there we could get almost exactly the same rate as home loan rates to two and a half percent for your SMSF debt. Yeah, and I can tell you when you were just for two and a half percent.
Interest only sometimes yeah.
Yeah, when you were just for two and a half percent interest, yeah, absolutely it works. But that's just the point. We're not in that environment anymore. We're in a higher for longer environment. Really nice to see some a little bit more reprieve coming through more recently, but these rates aren't going to come down rapidly the way we could expect. And even so today, right now, it doesn't stuck up.
Okay, now let's look at it more close to you. So so it's a sort of swing factor as such, and if the banks came back in that might change. But you find other issues upfront. Transaction costs Obviously it was a powerful point to you. I mean, they're always there in property. So I'm just wondering in terms of ranking the weakness if you like up the proposal of investing in super property, how you might spell that out.
Of course, I guess you're right. The transaction costs are obviously painful when you buy a property, and for every property investor is likely to understand some of those challenges around not just stamp duty and conveyancing costs, but you know, perhaps you might have a buyers agent some of those other costs that you're incurring. Probably the overarchingly the biggest detriment to the argument of investing money inside a self manage superannuation if I'm buying a property, is that for
the vast majority of Australians, the money's already invested. And it's a very important point if we consider your traditional residential property investor, who you might have enough equity in their existing home for instance, to say, right, maybe we can get an investment property. Well, that money's not invested right now. You know, you're certainly you're getting some benefit
from perhaps offsetting against the home loan. But what we're doing is we're locking a new investment with its own features, whereas with a superannuation fund for most Australians, we are taking money out of an environment where the money is already professionally managed. And I'd like to imagine for most Australians,
especially in the current economic climate, doing pretty well. And so when you take money out of that environment and then put it somewhere else, in order to outperform James, you really have to hit it out of the park with that investment to catch up on all those transaction fees and just get yourself ahead.
You make that point that maybe you know in the last thirty years it might have worked, but you're very skeptical about Oh oh my gol. From here, I'm just quoting from your own post on this to my amazement, buying a property through a certain it is super fund would likely leave me more than a million dollars worse off over the next fifteen years compared to simply maintaining a high growth superannuation portfolio. I check the numbers, I check them again, and they were right. Okay, let's just
play Devil's advocate here. Let's say there was a thumper of a stock market crash and I remember having a property in my SMSF in the GFC, and I was so so glad I had it because it was the only thing that wasn't at least in visibly falling through the floor. So what sort of a defense is that for the proposal.
Oh, it's a great argument, and it's certainly something to be considered, because when I think about stock market crashes, my mindset is not if, but when they are part of investing in the equity market, and that's going to happen. Having said that, where we start to go now is around a non financial argument in the sense that there's the benefit the peace of mind of having the money
in an asset that perhaps isn't as volatile. Now, if we have an individual year, if we said what's going to happen over the next three to five years, and you had to make that decision, let's ignore transaction fees. Just because we're talking purely one versus the other. You could mount a better argument for property on the basis that it's less likely to be less volatile and less susceptible to you know, that big share market crash like
the GFC or COVID and those sorts of collapses. But noting that when we're talking about a fifteen year time frame, which in theory is two full market cycles, Like let's reflect on fifteen years post GFC to twenty twenty two, for example, we know we had we'd had enough time for those returns to well and truly be washed out of the market. So over that longer term timeframe, which I think is the way that most Australians view their superannuation, I still know that we can rely on the numbers.
Okay, right. I found the interesting one of the very interesting things you pointed out was that that issue of just to spell it out, the strategy could never recover from the huge upfront transaction costs, ongoing SMSF administration fees and property holding costs and higher interest rates on SMSF loans. That's so interesting. I think you were on top of all that. You didn't mention. You probably didn't have to mention.
But something that comes up on the shore regularly is it's a lot more work to run a property than to run an ETF. I mean, what do you do with the ETF. You look at it now and again the numbers change ever so slowly. A property is it's a headache, right, if you've got it, it's a headache, but it's yeah, it spot on.
Yeah. And not to mention, of course, you know, with an ETF, because it's a lot more liquid, you can make more strategic decisions around it, like if there were a big crash, you could say, okay, well we're gonna I don't want to have that level of exposure anymore and so on, whereas you're less able to do that with a property. If I may, I would love to canvass one thing because when I put this out to the world. I had all manner of comments.
So yeah, what was a response like, let's just let's put the property sort of, you know, the fervent property lovers to one side. What was the general response to you.
There's a lot of gratitude for actually having shared the entire numbers of it, and not just saying, hey, here's how I here's my gut, but saying, like, the mats behind it is here, and if you want to play with the mats and adjust it, feel free. But here's the mats, and you know you can find that. You can find all that information online. But for the people that were critical of it, particularly in that property space, you know, most of them naturally had a property lean
And I don't say that in a negative way. I actually with reflecting on their answers and looking at them closely, what they were really saying is, you've used the long term average, the thirty year long term average for property growth according to core Logic. It's the best long term data point I could find. And their argument was, we think that we can outperform that. We think if you go to a you go to a great buyers agent, and you buy the right asset, you can do a
higher earnings rate than that and for what it's worth. James, I actually support that I have investment properties. I always go to a buyers agent when I do that. I absolutely believe in the value of getting professional advice there and paying for it. And to that end, I think overarchingly, the real thing that I want to drive and the motivation to put this out to the world, was to encourage Australians to be so much more scrupulous around the
asset that is being purchased. If you are to do this saying it's impossible, I'm saying, yeah, your observation was for and most people most of the time.
That's with most properties. It's a very bad idea to put it in an SMSF. Yeah, but you allow for exceptions because old properties or property is individual. As they say.
Of course, if you had the good fortune to buy in Perth a few years ago, then you've got a totally different story and you can say it smashed the super funds despite them doing well. There's always exceptions, but for what Welcome your comments, James, But I often meet with people who have properties in their SMSF and it breaks my heart to see people that have purchased. You know, thirteen years ago. I bought this apartment in out of suburbs Melbourne. I spent five hundred grand on it thirteen
years ago. It's worth exactly the same amount because it's the strategy might have been the right strategy, but the due diligence around the asset. They might have just taken the property consultant's word for it, or just bought one that was nearby that they knew was available. I cannot
stress you enough. If you are looking to do this, you must be relentless about getting the right people on your team in the right research to say v sas an asset that's going to significantly outperform the long term trend of property more generally.
Yeah, okay, and it's a big call. It's a big call. All right, we'll take a short break. We'll be back in a moment. Hello and welcome back to the Australians Money Puzzle Podcast. I'm James Kirby and I'm talking to James O'Reilly. Now I should have introduced James more fully at the start. James works with Northeast Well that's his group.
He's responsible investment advocate as well and on top of that, the host of the Australian Retirement podcast, which is quite well known, and that is why, of course he's been so smooth and articulate in his responses and segment one because he has his own podcast all right now, James, one of the questions that I normally have questions at the end, but I have a question and it's kind of in there in the a while, and I wanted someone to answer it. I was waiting for someone basically
to come along who could answer it. It's from Pete and he asks a very simple question, what really is ethical investing? Now? That's something we could go all over the place on and it's a movable feast to some extent. There are new government labeling laws coming in in Australia, which is a good thing to really try and define it and stop the greenwashing. But in your world financial advice,
responsible investing, how does that basically take shape? If you've got that on your shinkle outside of the door, I'm a responsible investment advocate, does it? I presume some people say that's not my kind of thing. I just want the best results. But when people come through the door on that proposal, how is it different? From anyone else.
Yeah, thanks mate, but very thank you for the kind words back there. So our philosophy, the way that it's different is that where possible, we are going to be seeking to look at your capital responsibly and specifically sustainably is our mandate. Now, I say where possible, because as you've pointed out, people all have different values and different things that they want to they want to focus on.
There was a wonderful study done by the RIBA, which is the Responsible Investment Association of Australasia, and they do an equivalent sort of this study every year and it always seems to say about the same thing, which is words to the effect of around ninety percent of Australians expect that their financial advisor should be considering responsible investment
as part of their overall philosophy. And what that speaks to I believe, and I think it's reinforced with the way that we serve people, is that the vast majority of Australians would like to have some sort of focus on responsible investing if it were tabled to them as part of the overall advice process. But unfortunately with financial advice, as far as I'm concerned, my experience is far less than a quarter of the time. Is it tabled and or properly tabled to say, have you given thought to
investing in line with your values? And they're particular things that you would like to either focus on or are the things that you would like to exclude and not be invested in. And that's what we want to afford people to.
Do today, oh, yesterday or this week. How does that make a difference. Are either certain investments that are off the table and are there certain investments or behaviors that you actively seek to follow?
Yah, our default is as in without When we have someone that says, yes, I'm open minded to investing money responsibly, but I don't have any really strict views around the sort of things I'd like to include and exclude. Is to use what's called the United Nations Sustainable Development Goals. A lot of listeners might have heard of the expression SDGs, and that's these sustainable development goals have been to put forward.
There are sixteen of them by the United Nations. Things like, for example, poverty, education, and a whole heap of important fundamental things that should hopefully result in a better planet. And so, especially in today's day and age, there are some wonderful tools that a enable portfolios to be really easily screened to say, well, what's in this portfolio. We've got this ABC High Growth fund, for instance, where's the money invested? What are the companies actually doing within that fund?
Are you comfortable that the definitions that are used in the screening really reflect what you and your scient have been talking about.
That is a very good question. I think that we're getting a lot better at this. You mentioned at the beginning that we are seeing in a wonderful way a much heavier focus and a much stricter focus around doing
exactly what you say is on the tin. And we've seen examples in the past where you have a particular fund that says, here are the things that we want to screen out of, and then you look at the constituents of the fund and say, well, how do we have this position in it, for example, because that doesn't belong here. So I'm comfortable in the sense that we I think we do a reasonable amount of due diligence here, but also I emphasize here that the focus d' especially
given the responsible investing. As far as I'm concerned, it's still early in its journey focuses on progress rather than perfection. You know, and I've explained to many members before, we will do our level best. If we uncover that there's a particular fund that's investing in a particular way that's at conflict with what your perceptions are, we will either prictic we'll let you know about or address it as soon as we as soon as we can. But broadly we're in a better spot.
Okay, hopefully that's useful to you, Pete. I mean, in practical terms, with an advisor, at least it becomes they in turn, in trying to implement or overlay ethical investing on an advisory package, if your life for an individual, they're depending to some extent on labeling and screening, and
these are practical aspects inside financial planning. The problem and the backlash largely over ESG and that broader area of ethical investing, reflected by Trump in particular and the US administration, was that, I mean, some people don't agree with it at all, obviously, but people who are neither particularly devoted on either side. The labeling has been an issue, and there has been greenwashing, and it has been easy to
talk investments and to jump on the bandwagon. Basically, there is a strong ray turn in the Europe particularly on this, and the Albanese government is also changing and bringing in stricter labeling laws, and that hopefully was start to clarify and make it all easier and more believable, I think for everybody in the near future perfectly then interesting that whole piece around ethical investing, I mean, one of the things that comes up all the time is how the
whole industry operates. I have a question also from Carl, which is not a million miles away. We had Liam Short on the show a while ago and he was warning about these free superviews. I wonder sometimes about ethical investing in relation to financial advice, that if we could at least stamp out bad behavior, that that would be a win. Let the investment industries figure out the labels.
But Carr's question says, for instance, on a recent show with Liam Short, where Liam was warning about the marketing of free super reviews, James, you said nothing is free in financial services. Carl says, I just want to highlight that financial counselors are a free service and people experiencing financial hardship can contact the National Debt helpline, whether it's one or several sessions with the financial counselor, they're highly experienced,
passionate group of professionals who make a real difference. Okay, thank you, Carl. In fact, we've had a financial counselor on the show. Rob Burgess was on some time ago, but more generally, James. Because because you're a financial advisor, James O'Riley, and because you are a responsible investment advocate there, do you think that ethical investing as it applies to financial advice. It seems to me they never seem to be able to stamp out the bad guys. And we've
had the first Guardian affair this year. We've had quite a spectacular string of embarrassments and scandals in financial advice this year. It seems, I mean, can it ever be stamped out? Is that the ethical challenge really in financial advice? Yeah?
I suppose it is, James, in the sense that you're right, We've taken a lot of steps already as far as I'm concerned, in order to make sure that financial advice is better delivered. There's now higher standards around becoming a financial advisor. The requirement to get a degree to complete
an exam which really dials into financial advice. You know, these things are these mechanisms were designed to weed out people simply just slipping into the profession with the license they got from their weedies box then and then performing or doing work that wasn't in client's best interest. I think we can get a lot better at this is
my initial answer. And like with First Guardian for example, that was as far as I'm concerned, that was a known issue for a long time before it actually came to the fore of becoming this enormous issue that it is now. Now, you know, there's a lot of ways that potentially you can address that. One of the obvious ones is to whether it's giving acid more control, giving them more information more regularly, and enabling them to more quickly look at any financial advisors practice or a licensee
and say, okay, we've got concerns. Now we're going to deep dive into this a little bit more. I would love the day. I love to imagine a day where there is none of this going on in financial advice. But also I've got a healthy dose of cynicism too, and I think that when you've got environments where people are trusting others with their money. There's always going to be a level of unscrupulous behavior.
Maybe that's a more pragmatic aspiration that it's like becomes like the law or accountancy, where yes, there are scandals, it's just not a scandalized profession. And maybe financial advice is inching towards that, though unfortunately this year would not seem to be a year where it make grip progress. All right, we have some very good questions. In fact, just a question which we want to do with the third segment. But it's really interesting and I haven't heard
this question before. It's from Drew and it picks up on something that I think it's going to become a really shoe because of the creep, if you like, of the superannuation guarantee, which is is there a point where you really shouldn't be forced to save for super when you have more than enough? Back in a moment, Hello, Welcome back to The Australian's Money Puzzle podcast. James Kirby and James O'Reilly, who is from the North East Wealth Group on the show and also from the Money from
the Australian Retirement podcast and a regular podcaster himself. Our guest this week, the questions from Drew. You've seen it, James, let me read it out. I've tried to edit it as much as I can. I think it's really good. Here goes. I'm forty three, and I've had a successful career and always been a high income earner with superannuation benefits that exceed the compulsory contributions by employers. I'm fortunate
to have a good superbalance. Suffice to say, if I was to stop contributing to my Super, the compounding interest would take my balance above three millions. So he's going he's going to hit the new tax sooner or later. Here's his key point. Every year I exceed the cap and I have to pay the fifteen percent on the amount over and this is this division two nine three,
which is basically a high income earner super tax. But he says, with limitations on Super and penalties for being a high income earner, I would like your opinion on the idea of opting out of compulsory super if your balance is high enough, and take that payment as part of your salary. I see where you're coming from, Drew.
There's a point now where the twelve percent compulsory super is pushing people over into penalized areas already, pushing them into that division two nine three already if people are familiar with that. But the bigger point that Drew was asking is in the compulsory supersystem. The idea was to let everyone make sure they have some super, which was great.
We get to the point at twelve percent where a lot of people are being mandatory super contributions where their money could be better spent elsewhere, or at least some of it, because it probably more than covers for their retirement comfortable retirement by the numbers at least. What do you think, James Riley?
Wow, great question, Dre Thanks very much for putting it forward. And also great that you're doing well. It looks like things are going really well for you. So hats off team mate.
Yes, at forty three, he's in a good position. This certainly sounds.
Like not bad at all.
Yeah. I think it's a genuine issue. And all right, okay, you know, no one's going to march in the streets about it, of course, but this is an investment and wealth show. We will talk about it. So what do you think.
Well, there's two things that stand out to me. The first one is the financial argument for it, and then the second is the broader argument in terms of what's
the purpose of superannuation system. Let's start with broader argument, because yes, as you've eloquently pointed out, the purpose of that superannuation system was to ensure that Australians had were self funding their own retirements, and especially in the years gone by, the superannuation system was far more advantageous in terms of concessional tax and what you could do there to encourage that more Australians saved for their own retirement.
So if we're using that lens only, then it makes perfect sense in my mind's eye for there to be a certain number level whereby you say, well, actually you're good here, and it now becomes never becomes optional.
I might just pick it, but we're running out of time, so I think we might just leave that there. No, we will leave that there for our listeners to chew on. I think you've answered it very succinctly, and Drew has put it very well, and it's an issue I think that would come up again, folks. If the super guarantee mandatory charge has gone to twelve percent, is there a point at which you shouldn't be made put money into super if you don't need it. I mean, I would
have thought it was pretty obvious the answer. Let's see what you have to say. The email is the Money Puzzle at the Australian dot com dot Au. Very good, James, Alright, sorry we've run out of time. Well, great to have you on the show. From Northeast Wealth and the Retirement Podcast. We'll talk again.
Thanks James, really grateful to be here.
Lovely to have you on the show. Okay, let's have some more emails The Money Puzzle at the Australian dot com dot Au. Talk to you soon.