Managing cash flow for property critical in current market, SMSFs told
With a significant volume of supply still yet to work its way through the property market and rents now lower, it is critical that SMSF clients with property in their fund proactively manage their cash flow, warns a property management company.
Property management company Certainty Property said while buying property through an SMSF was a strategy that was widely advocated a few years ago when prices where increasing and rents were rising, conditions have now changed markedly in the past 18 months, which has caused cash flow issues and unplanned payments for some funds.
Certainty Property director Cameron Black said while some have been brave enough to call the bottom of the market from a price perspective, there is still a huge volume of supply yet to work its way through the market especially of newly built apartments.
“This is resulting in lower rents and longer vacancies, with vacancies stretching up to 60 days in some Sydney suburbs,” Mr Black said.
“In light of this, it is more important than ever that SMSF trustees are proactively managing their cash flows.”
Cash flow is particularly important for SMSFs, he said, as any borrowings need to be paid from the fund.
“That is, if the property is negatively geared, the fund must have sufficient cash on hand to make repayments,” Mr Black said.
Certainty Property’s investment adviser, Simon Peisley, said there are some strategies that SMSF professionals and their clients can use to help bridge the gap between rental cash flows and borrowings in SMSFs.
Mr Peisley said advisers should look at the cost structure of the fund to determine if interest payments can be reduced.
“There have been a series of recent rate cuts and there is no guarantee that your bank has passed through the entirety of the rate cuts,” he said.
“Keep in mind when negotiating that a number of providers have left the SMSF market, so there isn’t necessarily the same competition as in the residential mortgage market.”
SMSFs should also examine the return they are receiving on the cash balance within their fund.
“This is one aspect of SMSFs that is often overlooked and is particularly important in this low interest rate environment,” he said.
“Cash is a generic commodity, and there’s no reason why you should not be paid the maximum market rate for making it available to a financial institution.”
A focus on how to maximise the cash flow generated from the investment property is also important.
“The key here is to take a completely objective approach to rental income generated. If reducing the asking rent by $20 per week is going to save you from the property being vacant for four weeks as well as agent fees, then you should swallow your pride and consider it,” he advised.
“Similarly, ensure your property manager is proactive with arrears management.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.