Important considerations when buying a property through a self-managed superannuation fund

Investing in property through your self-managed superannuation fund is a big decision, one which not necessarily is suitable to everyone. Over 1 million Australians have their retirement savings invested in a SMSF, with over 7% of SMSF holding residential property as an asset. Since 2007, funds have allowed members to borrow money in their SMSF to purchase assets such as property.

Investing in property is a long term, low risk investment. Yet with the current market prices and condition, using saved money from your SMSF to invest may seem attractive to many. However it is important to seek independent and professional advice before buying property via your SMSF as this strategy may be unsuitable for you. Call Marco Scannone at Stars Broking Service today on 0405 252 808.

“I have many clients who come to me wanting to buy a property in their SMSF and on paper they would have no issues being able to go ahead with the deposit and borrowing. However, whilst they may meet the bank’s borrowing criteria, the main issue is their inability to meet deadlines, pay statements on time, make financial decisions and manage their financial affairs. When buying a property via a SMSF there are strict rules you need to follow regarding what you can and what you can’t do with the property and money in your SMSF, precise record keeping is a must. Even if you hand everything over to an accountant there is still work required.”

A self-managed super fund is a fund established by one to four people for the sole purpose of providing retirement benefits. Rather than paying super contributions into an industry fund, you pay it into a fund that you manage and take personal control of the assets invested.

By self-managing your decide what to invest in, which could include property. Investing in property through your SMSF can have significant benefits for investors as well as factors to take into consideration.

Benefits of investing in SMSF

  • All running expenses of the property are paid by the fund which means you are not out of pocket in the same way you would be if you directly invested in a property through income and savings
  • Tax: SMSF benefit from concessional tax rates. In the accumulation phase, tax on investment income is capped at 15%. In the pension phase (once retired) there is no tax payable, which includes no tax on capital gains or rent
  • You have direct control of your super investments and the diversifications in your portfolios.
  • SMSF trustees must lodge an annual tax return and audit, and pay ATO fees. ATO fees are capped and not based on a percentage of your super balance. The more an SMSF grows, the more cost-effective it becomes, but the total cost of running an SMSF will depend on the related investments and any costs associated with engaging professional support.

Considerations to be aware of

  • Properties purchased by the SMSF are strictly investments. You or a family member cannot live in the property
  • Renovation of a property in the SMSF are not allowed
  • Set up costs of a SMSF are expensive and need professional attention
  • Higher application and legal fees involved when getting a loan through SMSF

Investing in property is a risk especially through a SMSF. It is important you are aware of the financing options available to you. Common  questions I receive are listed below.

How much do you need to have in your super to buy a property?

Generally speaking there is no specific amount that you are required to have in your SMSF. However there is certain criteria the bank will require and other considerations in which you as the trustee of the fund will need to assess. From the bank’s perspective the maximum amount they will lend is between 70-80% of the residential property price. Some banks require you to have a buffer in your SMSF which means you cannot use all your money for the deposit.

How much can I borrow?

With a residential SMSF loan, you can borrow up to 80% of the investment property provided your super has a corporate trustee. The amount of money you have in your SMSF is an important consideration if you are thinking of investing. The banks will require a 20-30% deposit of the residential property price you plan to purchase. With the current market prices and additional fees it is important you seek independent financial advice to ensure you make a smart investment decision rather than landing you in a financial risk situation.

So what is the first step?

If you are thinking about buying property through your SMSF, before setting up the fund you must first sit down with a Broker who is an expert in SMSF lending and has an understanding of Limited Recourse Borrowing. This is a unique investment and requires specific expertise. Call Marco Scannone today.