Tips to get the biggest bang for your buck when investing SMSF in property

More than one million Australians are members of self-managed super funds (SMSF). Source: Getty.

According to figures from the ATO, more than one million Australians have taken their retirement income into their own hands and are members of self-managed super funds (SMSF).

While many workers choose to pay into industry, retail or MySuper funds throughout their careers to build up a nest egg ahead of retirement, following the introduction of compulsory contributions in 1992, being a member of a SMSF offers more autonomy over your hard-earned cash.

From having total control to fewer fees, there are several benefits to going it alone as far as your super is concerned, and many then choose to invest the contents of their piggy bank in property as a way of further boosting their retirement savings, before they give up the rat race for good.

However it’s no easy feat as you’re solely responsible for providing retirement benefits to other members – a SMSF can have between one and four – as well as ensuring that the fund complies with superannuation and tax laws, meaning you need to make sure you have the time and knowledge to manage the task.

If you’re in charge of a self-managed super fund and are considering investing in property, there are several things you should be aware of before signing on the dotted line, and Pat Kelly, principal at Burgess Rawson, has shared his top tips for SMSF property investment with Starts at 60.

Read more: Count your pennies! Australia’s favourite super fund revealed

Learn the basics

“Those looking to expand their property portfolio via their super account must do so through a ‘limited recourse borrowing arrangement’,” Kelly said. “This is a type of gearing that allows the investor to purchase a single asset, like a residential or commercial property.

“While geared property investment represents an attractive opportunity, it also comes with its share of risks, including higher costs, difficulty in cancelling the loan, possible tax loses from the property, and the inability to make significant alterations or renovations to the investment.”

Speak to a pro

Kelly stressed the importance of speaking to an expert before investing because there are “various tactics available that make for strategic property purchases with an SMSF”. For example, purchasing your business premises, allowing you to pay rent directly into your fund at market rate.

“Commercial property experts can guide you on additional options here, so it’s certainly worth seeking personalised advice,” Kelly added.

Follow the rules

According to Kelly, this means not buying the property from a person related to the superannuation member, not living in the property or renting it out to a relative, as well as meeting the ‘sole purpose test’ of only providing retirement benefits to fund members.

Choose wisely

“When deciding on the type of property asset that will best serve you in retirement, it is important to consider both the financial and non-financial benefits on offer,” he said. “For example, fast-food and childcare asset classes have proven extremely popular amongst SMSF investors in recent years, mostly due to their affordability and availability.

“However, other investors prefer an easily managed ‘set and forget’ purchase generally achieved through long-term lease arrangements that can offer attractive long-term financial gains without significant property management from the buyer.”

Know the costs

It may come as no surprise that there are myriad fees associated with SMSF property purchases and Kelly said it’s important to be aware of these from the get-go.

“Knowing all the upfront, legal, advice, ongoing property management, and bank fees are imperative for anyone looking to preserve their precious super balance, before they are in too deep,” he told Starts at 60. “To best ensure you are correctly informed, only take SMSF financial advice from a verified Australian Financial Services (AFS) licence-holder.”

Don’t forget insurance

Lastly, insurance! Kelly said that it is imperative to ensure you have adequate cover before going through with any investments.

He said: “When it comes to SMSF, taking out appropriate insurance is vital. SMSF property investment demands enough cash flow to cover loan repayments, and having the buffer provided by appropriate income, life, and TPD insurance ensures your obligations through the life of the loan can be met, come what may.”

Are you a trustee or member of a self-managed super fund? Have you invested in property?

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.

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