More and more people are talking about buying properties through their Super – but is it right for you?
SMSF has practically become a new buzz word in property, but there’s a whole lot more you need to know before jumping in. Short for Self Managed Super Funds, SMSF works differently to regular property investment.
Here are five things you should know about purchasing property through an SMSF:
Many of our clients appreciate the certainty of knowing where their Super Fund dollars are and controlling what they invest in. From my experience the average SMSF director has owned and invested in property for many years and feels secure putting their super into bricks and mortar.
When your retirement funds are sitting in a retail super fund – do you know what they are being invested in?
2. How much can I borrow
Loan to value ratios (LVRs) are typically lower for SMSF property purchases, so you will need sufficient funds to cover the deposit and costs of buying. Most lenders will also require you maintain a certain ratio of liquid assets in your fund – meaning you will need to have funds left over after your purchase/s.
3. Getting Started
It can also cost approximately $5,000 – $7,000 to establish your fund – as you will need to establish a Trustee and a Holding company in order to purchase property. Maintaining your companies, including getting their Tax Returns done and audited each year, can run into a few thousand dollars per year. Owning a number of properties through your SMSF will help to offset these costs.
To make this sort of purchasing structure worthwhile, many advisors recommend a starting balance of at least $200,000 in your fund. The good news is up to four people can be included in your fund and roll all their Super Funds together.
You can get pre-approved for your SMSF purchase before establishing your SMSF – so speak to an SMSF approved mortgage broker or bank about your SMSF borrowing capacity.
4. Good cash-flow is important
A conforming SMSF is generally taxed at 15% on nett income – which is great if your properties are making profits. However, if you were to make a nett loss on your properties you are not able to offset that against your personal earnings, so there is no tax benefit.
On the flipside, a property with a strong income can mean thousands of dollars in earnings going back into your SMSF and the nett profit will only be taxed 15% rather than your applicable tax rate, which can be up to 47%.
5. Due to the complex nature of SMSF loans – only work with experts
Surround yourself with a mortgage broker, accountant and solicitor/conveyancer who are experienced with SMSF purchases.
The application process takes longer and is more complex than a regular loan. There are also many legal and financial obligations that not everyone is aware of and they can slow down your purchase and sometimes lose you properties or cost you large penalty fees.
Also, as SMSF loans cannot be increased to pay for renovations or with growth in the value of the property, you need to make sure you get the loan right in the beginning.
If you are interested in buying properties through your own SMSF, please contact your approved Aussie Broker to find out more information.
Do you have a question about SMSF? Ask us in the comments below and we’ll respond!
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