Fri 06 Apr, 2018
3 Considerations for SMSF Property Investors
Whether you’re a seasoned SMSF investor and you’re looking to grow your property portfolio, or you’re new to self-managing and you’re interested in the real estate game, there are plenty of factors to consider. While property investment with your superfund can be an exciting and lucrative way to grow your retirement, this guide explains three key considerations for investing in property with your super.
Limited Recourse Borrowing Arrangements
If you thought a regular mortgage was complicated, you’ve not seen anything yet! Up until 2007, the capacity for borrowing against your superfund was pretty minimal, but since restrictions were relaxed more investors have come to the party. And it’s no surprise, really, given the exorbitant growth the property market has seen. That said, SMSF property investment borrowing is only permitted on a limited recourse borrowing arrangement. Essentially, this means that any recourse the lender has under the borrowing arrangement is limited to the single asset purchased using the LRBA.
That means, there are more regulations to comply with, too. You can only repair or maintain properties held under an LRBA – you cannot improve them. Once your property is fully paid off, you have more freedom, but until then you must play ball with the ATO and your lender. Repairing and maintaining can have a number of meanings, but they basically cover any changes or modifications to a property that don’t add value or appeal. For example, repairing or replacing a damaged roof is okay, but installing a swimming pool is not.
When it comes to renting out your property, there are rules here, too. These rules apply for the lifetime of the asset, too, not just while you’re on an LRBA. Nobody known to the fund owners can ever live or stay in the property, and the fund owners can’t themselves either – even when they’re retired.
You can sell the property to yourself in retirement however, but stamp duty is a consideration at this stage.
Read our post on 3 Ways to Finance Your Property Investment
Cost vs Risk
TV shows and media hype can paint a picture of real estate investment that’s a far cry from reality. What can look like a super-fast money maker can actually be an expensive one way ticket to regret. Make sure you consider the upfront costs and how they relate to the overall level of risk before you buy a property – buyer due diligence is key.
Using your superfund to buy property doesn’t mean you avoid upfront costs. You’re still liable for stamp duty – and remember, there’s no concessions or exemptions as an investor. If you’re borrowing to buy, your costs increase further. Most lenders will expect superfund investors to have 30% of the property price as a deposit before they’ll consider lending to you, so bear that in mind when exploring the market. For a $450,000 property, you will need $150,000 on the deposit alone, and between $13,000 and $26,000 of stamp duty depending on the state in which you buy.
Generally, SMSF property loans attract a higher rate of interest and higher running costs than a regular owner-occupier mortgage, and if rates go up, your fund may struggle to yield a profit. Be sure to retain a level of liquidity in your fund – don’t put all your eggs in one property’s basket. The property market is a volatile beast. Investing your entire fund in one property is a big risk that few can afford to take.
Other upfront costs facing those buying property with their super include legal fees, advice and advocacy fees (if used) and the administration and tax compliance fees that your SMSF will attract once you jump into property investment. It’s not just upfront costs to consider, either. Remember you can’t live in the property yourself – you’ll need a property manager to source and screen appropriate tenants, carry out routine inspections and report back to you on the condition of the property itself. On average, expect to pay around 7-10% of your weekly rental income for this service. There may also be fees associated with annual reporting from your PM, and commissions involved with tenant turnover.
Handy tip: if you’re considering skipping out on a property manager and handling the investment yourself – don’t. A good property manager is worth their weight in gold – particularly for SMSF investors.
Read about the tax benefits of being a SMSF property investor here.
Do You Have An Investment Strategy?
Because you’re using your superfund to invest, you might feel less connected to your purchase. After all, your super balance has been building for years – it’s not like you’re sacrificing hard cash that you’ve saved up yourself. That said, it’s incredibly important to invest with a strategy. Whether you’re looking for capital growth or a consistent cash flow, be sure that the property you buy complies with both your property investment strategy and your superfund’s strategy. A buyer’s advocate may be able to assist in establishing your strategy, and in sourcing properties that meet your requirements.
In general, it’s important for all superfund investors to remember that buying property with your superfund is entirely different to standard property investment. While it can be a great way to build your retirement fund, mistakes can be catastrophic to your savings plan. Our Squirrel Super team is able to explain the ins and outs of property investment in more detail before you get started. Get in touch to get started on your journey to unlocking property asset wealth through your superfund.
Read more about property tips to build wealth for retirement here.
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