A side effect of tight credit policies is that more and more people will be looking to buy property in other ways. That’s because even though the credit may dry up, the desire to buy doesn’t.
So, what can you do if you want to purchase property and the Banks decide you can’t?
Well, one answer is to buy in a Self-Managed Superannuation Fund. Now, let’s be clear before we go any further. Credit rules still exist in the SMSF lending space. In fact, the rules tend to be stricter than those outside of super. The attraction is that most people already have a sizeable super balance and the employer contributions plus the potential rent will normally cover the repayment. It’s possible to buy a property in an SMSF and not impact on your after tax cash position. Obviously there are costs in setting up an SMSF, there are also ongoing costs running an SMSF such as Audits and Taxation Returns and usually minimum balances of around $200,000 are required by most Lenders. While you have a very specific set of obligations under a SMSF, it is definitely an option to increase your wealth.
Naturally, we suggest you see a Financial Planner and talk over your situation if you are considering an SMSF, preferably before you do anything. A Financial Planner will show you the pros and cons of using a SMSF as part of your wealth building strategy but more importantly you will be able to get an understanding of how a SMSF fits into your situation. Like most things, an understanding of the issues is a very important piece of the puzzle when you are considering whether to use one.
On that basis, buying a property in a SMSF is an option most people should explore.
What are the benefits of buying a property in an SMSF?
- Property is a stable and relatively low risk investment
- Property can offer considerable returns on your investment
- Property provides diversity within an investment portfolio
- The Employer superannuation contributions and the rent can contribute towards any loan repayment amount
- Positive Geared property provides a passive income stream
- You have control over property and can increase value through renovations
- Property provides some tax benefits when held inside a SMSF structure in relation to CGT (For example If you buy a property through an SMSF, the fund will pay a maximum 15 per cent tax on rent it receives from the property. On properties held for longer than 12 months, the fund receives a one third discount on any capital gain it makes upon sale, bringing any capital gains tax liability down to a maximum of 10 per cent.
Once fund members start receiving a pension at retirement and assuming they’ve held the property in the fund for this long, the fund will no longer pay tax on either rental income or capital gains when the property is sold.
Sounds pretty good so far doesn’t it? Let’s have a look at some of the risks to balance the picture.
What are the disadvantages to buying a property in an SMSF?
- The property may be untenanted at some point
- Property is not as liquid as shares – time is required to market, sell and settle
- Purchase costs such as Government Stamp Duty can be substantial
- Selling costs through a Real Estate Agent can also be high
- Property has ongoing costs such as Council rates, utilities as well as maintenance requirements.
- Property Management incurs a fee
We can see that property inside a SMSF could take longer to turn into liquid funds and that there are ongoing costs involved in ownership. Of course, these ongoing costs occur whether the structure is inside super or not.
Is buying a property in a SMSF for everyone?
Purchasing property through an SMSF is not advisable for people who don’t have a large enough lump sum. Ideally the fund should be large enough to support a property purchase and provide for unforeseen expenses and situation without distress. Besides, most Lenders will require a minimum balance of $200,000 before they will consider a loan application anyway. It’s also healthy to have a measure of diversification in their superannuation investments.
The other part of the equation is that borrowing through an SMSF may not be a good idea for low-income earners who would have to stretch themselves in terms of cash flow.
In the end, we can see that for the right person, buying a property in an SMSF is a sound way of adding to your retirement strategy.
Why not make an appointment today with one of our qualified SMSF Financial Planners to discuss your situation.