Property investing is a great way to build wealth over time and using a self-managed superfund (SMSF) to do so can offer a host of benefits.
An SMSF differs from the traditional superannuation model in that you are the trustee of the fund, which allows for greater control over your retirement savings (and ensures you can make additional contributions, rather than relying on your employer to make them on your behalf). One of the freedoms SMSFs offer is the ability to invest in residential real estate such as a single property – an investment you can’t make through a standard super fund. The Australian Taxation Office (ATO) reported in 2019 that residential properties comprised just under 5 per cent of all of the assets held in Australian SMSFs.
Anyone considering purchasing a property with their SMSF, though, should be aware of the process involved, follow the stipulations outlined by the ATO, and develop the correct structure – this will help ensure a successful, seamless investment.
As such, I’ve got six tips for doing just that:
Use a limited recourse borrowing arrangement
When investing in a property using an SMSF, there are two options at your disposal. Firstly, you can make the purchase using the existing money in the fund. However, this will not be an appropriate option for those who have not been saving for an extended period of time. Instead, you can create a limited recourse borrowing arrangement (LRBA). This involves taking out a loan from a third-party lender, whereby those funds are limited to strictly being used to purchase a single asset. This will protect you in the event of an unsuccessful investment, as the lender cannot access money in your superfund that is not related to the property.
Look beyond the Big Four banks
The four big banks – Commonwealth Bank, Westpac, NAB and ANZ – are less likely to issue an LRBA, due to the fact that SMSF borrowing accounts for just 0.18 per cent of the total lending market. Fortunately, there are many small lenders who are willing to provide the funds required. However, you can expect to be required to provide a 20-30 per cent deposit on your purchase, along with a slightly higher interest rate on your loan.
Invest sooner rather than later
Changes in government policy and regulations could lead to restrictions being placed on property investments and on SMSF borrowing that could prevent you from using your fund to invest entirely. If you start investing now using your SMSF, you may be able to protect yourself from future regulation changes. The laws under which you invested may get grandfathered in, which means you can benefit from the previous law, while others looking to invest once a changeover occurs cannot. However, it is important to be aware that there are not always guarantees in relation to grandfathering.
Be aware of restrictions around investing using an SMSF
A general rule of thumb to keep in mind is that you need to have $250,000 in your SMSF in order to move forward with a real estate investment. While this is not always the case and you could invest with a lower sum in the fund, many lenders will operate under this rule when making their lending decisions and may ultimately decide you are not a good borrowing candidate on these grounds. It is important to note that not having that type of sum will not prevent you from borrowing completely but it can make it more difficult. If you do not have the necessary funds in your SMSF, work with a suitable adviser to determine your options.
Understand rules around renovation
If your goal is to renovate and flip a property, advisors may try to deter you from investing using an SMSF. This is because there are certain rules around renovations that stipulate that you cannot renovate a SMSF-owned property using borrowed money. However, you are able to use the money in your SMSF to make these value-adding additions and changes to the property. While borrowed funds cannot be used for renovations, you may be able to use those funds to maintain the property such as, for example, by replacing certain assets.
Ensure the property meets the rules
First and foremost, investing in a commercial, residential or industrial property is possible to do using your SMSF. However, there some investment rules you must abide by at all times, as stipulated by the ATO. The rules state that any entity or person related to an SMSF cannot live in or rent the property. You are also unable to purchase the property from a related party, such as a family member. The property must also abide by the ‘sole purpose’ rule, whereby you maintain it in order to produce retirement benefits for the SMSF’s members. Failure to adhere to these rules can compromise your superannuation investment property.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.
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