How much Super do you need to buy an investment property? That’s a good question.
A much better question would centre on the amount of super you need to contribute to the purchase. Not surprisingly, the answer depends entirely on how much you can borrow because the more you can borrow, the less of your own money you need to use.
There was a time when borrowing by a SMSF was not allowed so creating wealth with Super was limited to investing in other asset classes. Of course, you could buy property but finance wasn’t an option for the general public.
Luckily we are now able to take advantage of leveraging to create wealth at a much faster rate. With this option available you can use less of your own money if you wish, by borrowing to your maximum capacity when purchasing investment property.
How much can you borrow?
The amount you can borrow is based on credit criteria such as income and security. From the income side, the contributions you make, the super guarantee payments your employer makes, along with any potential rent all count towards your borrowing capacity.
Banks will generally allow SMSFs to borrow around 70-80 per cent of the property value, however the actual figure will depend on where the property is located and the type of property you are providing as security. This information can drive the LVR down to as low as 50%.
In practice your borrowing capacity will probably be closer to 60 or 70% LVR anyway due to the nature of the Lenders serviceability calculators. From a cashflow perspective though, it is more desirable to have a 50% LVR so the property is positively geared or close to it.
Tax-deductible personal super contributions, salary sacrifice contributions, and compulsory super guarantee payments made into your SMSF, as well as any rent your fund receives on the investment property, can all be used by your SMSF to help cover the loan repayments.
It’s also important to have a sound strategy in place to pay the property off over time.
In addition to the income tests, each Lender will have additional criteria you must meet. Things such as Liquidity Tests and minimum balances are crucial for you to be able to borrow. This is where things start to get interesting. Lenders have introduced minimum balance rules. The effect of these new conditions is that you must have a certain amount in your Super account in order for the Lender to accept your application. The lowest minimum so far is $150,000 and $200,000 is becoming more common. This minimum is regardless of how much the property is worth or whether you even need to contribute $200k for the purchase. It is simply a Lender rule that every SMSF must have $200k balance for a loan application to be considered.
The final twist is that the $200k is required at the time of application and isn’t inclusive of the Deposit in some cases. So buying a property, paying the deposit then applying may rule out some lenders.
As you may have gathered, borrowing in SMSF structure is quite complex and there are many variables involved. The LVR will be determined by the postcode and property type while income from Super contributions and potential rent will go towards borrowing capacity.
These two factors combined are the key to your loan amount and it’s that number that will decide what amount of Super you need. Over and above all of that, keep in mind that a growing number of Lenders require a SMSF minimum balance of $200,000.
It is worth noting that these credit criteria rules are constantly changing in the current climate. In our opinion, having an expert help you sort through these things is a must.
Why not make an appointment with one of our Financial Planners today and let them discuss how a SMSF works and whether it’s right for you.