Buying Property in SMSF
Using super to buy investment property is a very popular way to build your wealth. As with any investment, minimising risk and maximising return or capital growth is a high priority.
By following a few simple rules, buying property in a SMSF can provide similar long term benefits as a property purchase outside of super. Using super to buy property as an investment offers several benefits. It has a passive income from rent and it may have taxation benefits from possible depreciation on the rental property or even Negative Gearing. Obviously there is also capital growth to consider. Which of these factors is the most important depends entirely on your point of view. There is an old Real Estate adage that talks about location, location, location being the three most important aspects of property selection.
Apart from these usual good real estate investing principles such as being close to transportation, shops, schools, parks, etc; we have added a few extra selection criteria of our own.for the investment properties to make investments work better and remain safer for superannuation purchases.
- We suggest that only investment properties that have a gross yield of at least 4-5% in the current market conditions be considered. Some extremely low yield investment properties, may have experienced tremendous growth recently but they, run the risk of being over-valued.
- Properties with minimum maintenance or repairs for long term holding.
- Properties in areas with minimum rental vacancy rates are to attract good numbers of quality tenant.
- Properties ready to rent with no extra set up cost.
- Properties with a purchase price at or below market valuations to avoid difficulty. during the valuation process
- Property types and postcodes that Banks accept as security for SMSF borrowing
- Off the Plan properties can provide value but SMSF Lenders are not attracted to the long drawn out completion dates and insist on properties being completed before application.
SMSF Property Selection CriteriaThese
- A rental property that requires the owner to actively work to generate an income all the time, i.e. some very actively owner managed student accommodation, bed and breakfast, etc.
- A rental property whose income is at very high risk of being discontinued by external factors, e.g. Wrapped properties which can be taken away from the owner or put back to the owner by the tenants.
- Properties that have a very small market. This requires you not to buy specialised properties or properties with certain commercial restrictions attached to them. Examples of these properties are serviced apartments, holiday resorts, mining town rental properties, rural properties, or properties in small population areas.
- Properties where mortgage insurance companies are not willing to insure them. These properties usually represent high volatility, i.e. price can drop quite significantly within a short space of time. foundTo find out whether a potential purchase might fall into one of these unsuitable criteria simply ask for an appointment with one of our Mortgage Advisors brokers.
Properties notbe considered as suitable for SMSF investment:
The restrictive nature of SMSF borrowing means a cash buffer should always be in place to provide safety and confidence. We recommend that you have sufficient cash reserves inside of a SMSF to cover unforeseen loss of rental income or loss of Super contributions due to a change in your personal circumstances.
Naturally, the size of this buffer will be different from person to person and we encourage you to speak to our Financial Planners who are skilled at sorting through these challenges.