NEWS & BLOGS

This blog discusses the opportunity of using your Superannuation money to help buy an investment rental property, and get a loan to help fund it.  However, to do this, you will need to have a Self-Managed Super Fund (SMSF), and enough funds to cover the deposit, and pay for on-going rental property costs.

First of all, you need to have an SMSF and have enough funds in there to help pay for all OR part of the property. Usually super funds get “rolled in” to your SMSF from super you have accumulated in other super funds. So, bit like a bank transfer, the funds go from your super you have already, and roll in to your SMSF.

You can also contribute personal funds, or have your employment super get paid in the SMSF, to help increase the available investment money in the SMSF.

 What happens if I don’t have enough to buy a property?  Can I borrow and how much can I borrow?

Your SMSF is allowed to get a loan to help purchase a property. However as the bank has security only against the property (and not other super assets or personal assets you have), the banks will only offer about 70% loan of the property price. So the SMSF needs to have the other 30% of the price plus pay extras like stamp duty.

But you will not get loan interest rates like you do if buying property in your own name – currently the interest rates are about 6.95% for residential and 7.45% for commercial property.

There is significant set up costs to borrow in the super fund, as you need to set up a side trust (usually called a borrowing ‘bare’ trust) that the asset and loan are placed in, whilst there is a loan. It is still an asset and loan of the SMSF, but for bank security, it needs to sit separately from other assets of the SMSF. So for an initial SMSF set up, the set up costs can range from $3.5k (if just your accountant sets up the structure) to nearly $7k (if you get a financial planner to give you investment advice (& including the accountant set up costs).  And for the borrowing entity for the SMSF, its similar costs to this again.  There is also the loan set up costs are about $1,000 for residential and $8,000 for commercial property.  So these costs needs to be considered if choosing to buying a property in your SMSF, compared to what the potential future value of the property may be in 10-20 years time, and the generous capital gains tax savings when you sell.

How to buy business commercial premises in your SMSF?

Similar to what is mentioned above, you can buy some commercial premises in your SMSF, like an office, factory, shop, etc.  This commercial property can be leased to external parties, or can be leased to your own business. The lease to your business must be at market rental rates, and must be paid on time per the lease agreement.

 Can I transfer property I already own into the SMSF?

You can’t transfer (or sell) residential property that you own in your own name into the SMSF, but you can transfer (or sell) a commercial that is in your name into the SMSF.

 Cashflow considerations:

The initial financial consideration is if the super fund can buy the property with money it already has and what it can borrow.  But then you need to consider what month to month cashflow the super fund will need to contribute to the loan and other property expenses, as the rental income may not cover all the expenses and loan repayments.  So super contributions may need to go into the fund on a regular basis, which can be from your super you get from your working salary, or personal or business super contributions.

 Main benefits of buying property in super are:

1. The capital gains tax is only 10% on the profit you make upon sale (which could reduce to 0% if sold in retirement).
2. With the help of borrowing, it allows you to have an investment of say $750k that can go up in value (capital growth), when you originally had only say $250k to invest.
3. You can combine your own and your spouse’s super together, to help buy a property.

Some disadvantages are:

1. When you already own property in your own name, the investments in your super are usually in Australian and overseas shares, so gives you diversity. So if you buy property with super, it puts a high % of all your investments that are in property. Which is why it is usually recommended to also have other investments like shares in your SMSF.
2. Borrowing to invest, can help increase your dollar growth, but can also have the opposite affect if the investment goes down, it can magnify your losses (as the loan will still get paid back first).
3. Loan interest rates are higher than personal rental loans.
4. There is high initial set up costs (which hopefully saves you in long run when saving on capital gains tax).
5. You are restricted in what renovations or changes you can do to the property, whilst you have a loan on the property.

 Other strict rules re property in a SMSF

1. Unless its commercial property, the property in your SMSF you cannot personally rent it or use it, or allow family members to rent it or use it ( the property must be rented at market rates to external parties).

1. You will need to ensure extra super contributions or wages super go in to the SMSF, to help pay off the loan, and pay for on-going fees.

 When considering setting up or investing in a SMSF, you should seek advice from a Financial Planner – this article does not give any express or implied investment advice or recommendations.

By Patrick Hoey – FCPA – director at Account(able) Accountants