Australian’s love investing in property, specifically direct property, Bricks and mortar. You may have some property experience yourself from paying off your family home and maybe even an investment property, so you probably have a view on property assets as well as stock market assets through your personal experience.
Buying property with your SMSF is not a small decision, but it is important your SMSF invests to suit your retirement goals and in an asset class you are comfortable with.
Now more and more people are looking to purchase property with a self-managed super fund. The ATO reports that 15% of SMSF investments are in property asset classes, that’s over 71 billion dollars. Self Managed Super Funds may invest in most types of property but typically many are opting to invest their funds in commercial and residential property. However, when considering buying property with your SMSF, you need to ensure it meets the fund’s sole purpose test of providing retirement benefits to its members and it must fit with the fund’s investment strategy that is also in line with an appropriate risk profile.
Can I buy My family home with my SMSF?
No. The family home cannot be bought with your super because if you or someone close to you is living in the property, a benefit would be gained before retirement. Buying you family home and deriving an early benefit would contravene the ‘sole purpose’ test and put your SMSF in danger of non-compliance, which means possible civil and even criminal charges. Your SMSF needs to be at arms-length and no early benefit gained.
What about Commercial Property?
SMSF’s do make it possible to buy commercial property. This is where Self Managed Super Funds become a hot topic for self employed and small business owners. Unlike retail industry or corporate super funds with an SMSF, you are permitted to buy your own business premises and the property can be rented on fair market terms to your business. This structure must be in line with the sole purpose test of providing the benefits in retirement. The return from the property through rent and growth must be the focus for making the investment viable and meeting your SMSF investment strategy. This structure can also provide protection to a business asset from creditors and it can even preserve a business asset after the death of a member. So property in a self managed superfund can be part of a much bigger family business and retirement plan.
Can I Borrow to invest in Property?
One of the recent changes that open up new opportunities in buying property with your SMSF is the introduction of borrowing for the purposes of buying a property in an SMSF. By accessing borrowed funds the property can be purchased sooner and the large amount of superannuation capital invested. You can also use your concessional super contributions to fund repayments and eventually buy the property outright for retirement. Future Assist partner with CLS Finance, who are SMSF lending specialists, to ensure you get the right loan, the right rate and set up correctly.
Concessional contributions are taxed at 15% which may be lower than your marginal text rate. There are risks to be conscious of too, for example borrowing magnifies your potential return from the investment but it can also magnify any losses. Interest rates can move and can increase the cost of servicing the loan. Tenants may not work out; the value of the property may decline. It’s also important to understand that there are limits on how much you contribute to your superfund, so you need enough money in your fund covering additional or unexpected costs in respect to the property.
There are strict requirements that apply to buying property in your SMSF. For example you’ll need a special type of loan called a limited recourse borrowing arrangement, it’s so named because the property used to secure you for the loan is the only fund asset the bank has recourse to if you default on the loan obligations, Therefore the lending qualifications and deposit required is significantly different to an non-SMSF loan. Also you need to ensure your loan is in the correct entities name.
Future Assist have extended experience with advising clients on investment strategies, and partner with SMSF lending specialists that can access over 300+ products from 30+ SMSF-friendly lenders. CLS also have the expertise to help you with the paperwork to set up a limited recourse borrowing arrangement.
As everyone’s circumstances are different, we recommend that you speak to a Future Assist financial Adviser to help you decide if buying property with your SMSF is right for you. Future Assist Advisers undertake extended SMSF training and development courses to ensure we are at the forefront of SMSF advice.
What are some good investment strategies for buying property with your SMSF?
With SMSF, you need to think differently to investing in property outside your SMSF. Unlike investing outside of your SMSF where most often capital growth is the most important factor, rental yield and contributions more often than not outweigh capital growth when investing in property inside your SMSF. This is due to the fact that most retirees would prefer a steady and increasing rental yield from their investment, than a lump sum with a low yield.
For example, if you are in your early 50′s and considering retiring in 10 years, a good strategy might be:
- Find a good rental yielding property that will have high rental demand into the future
- Salary sacrifice towards paying off that property off faster
This will fast track your ability to pay off the asset in conjunction with the rental yield and employer contributions and could ensure you pay the asset off within the 10 years, securing a asset owned outright that has a good and increasing rental yield with high rental demand.
The above is only a snapshot example. There are so many options and strategies available to you. Please consider the above as general and ensure you speak to a financial adviser before acting. Future Assist can help. Lets sit down and work out your goals and get the RIGHT strategy in place to see you reach those goals.
A SMSF could very well be a more appropriate way for you to reach your retirement goals however there are also a lot of risks and extra responsibilities associated with a SMSF.
As the regulatory & governing body of SMSF’s, the ATO suggest that you consider appointing an appropriately licensed professional to assist you with setting up and running your SMSF.
Prior to setting up an SMSF, we highly recommend that you speak to an appropriately licensed professional to ascertain whether a SMSF is suitable for you and your retirement goals.
Restrictions on investing in property within your SMSF:
Also, consider the SMSF Sole Purpose Test before proceeding with any investment decisions.
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Disclaimer: This website is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular personal financial or investment objectives, situation or needs.
You should assess whether the information on this website is appropriate to your particular personal and investment circumstances and should do this prior to making any financial or investment decision.
The information on this website is not a recommendation to invest in any investment or financial product. You should seek professional investment advice before proceeding on any information.