Cracking The SMSF Property Code
For those of you who love a good rollercoaster ride, the share market has certainly been delivering this year. But for a growing number of investors, property is now becoming a key component of their retirement planning.
Apart from constant regulation tinkering from the government, adding property to a self-managed super fund (SMSF) is growing in popularity. Even market commentators cannot deny the successful comparative performance of property over shares, stating investors would have been better off in property during 2015.
Of course, we need to set aside the fact that this kind of general comment is extremely misleading – there are some people who haven't done well with property over the past few years (hello Moranbah, some suburbs of Perth, plus a range of other previous hot spots).
Let's also feel sorry for those people who purchased properties through their 'financial advisor' who was actually just pushing over-priced new stock onto their unsuspecting 'clients'. Those people won't even realise their mistake for a year or two.
The fact is, with a reasonable amount of due diligence, purchasing property in an SMSF structure can be a good strategic financial choice however it is not suitable for everyone. So the first step is to determine if an SMSF is right for you.
If it's not evident already, we are not financial advisors. The best professionals to advise you on structures (SMSF, trusts etc) are qualified, reputable financial advisors or accountants. Just make sure you check their qualifications and be wary of those who dangle nice shiny 'easy' property right next to the structure agreement.
A good advisor will be able to establish your fund within approximately three months. From there, you should have an understanding of your budget, goals and your responsibilities in managing the SMSF.
From our experience, the majority of SMSF related issues arise when structures or finances have not been established correctly. So, when you have your structure in place, be sure to speak to an experienced broker to organize finance before you set your heart on a purchase.
Most brokers we speak to are currently still lending at the 80% mark, but say SMSF property purchases work best if you can cover 50% of the purchase then (ideally) let time, rental income and future super contributions boost your balance.
Spoilt For Choice
The good news is that there are ways to dip your SMSF into the property water gradually. Options include a range of 'indirect' ways you can add property to your SMSF – such as property or real estate trusts. Be careful to consider these as you would any investment by checking performance, fees and hidden charges.
If you want to buy direct for your SMSF – which is what we do for our clients – you may be surprised by the range of property types you can choose from. Categories include:
- residential property (although not your family home)
- holiday homes
- hotel rooms / serviced apartments
- retail, commercial and industrial property
- vacant land
- rural property
- car parking spaces
- international property
Next, it's just a matter of what works best for you and your targets. The whole SMSF space can be tricky, so a little more than usual common sense will be required although it will be worth it in the end. Outlined below are some key pointers to use as a guide when working your way through the process.
- The acquisition must be for the purpose of generating income and / or capital gains to contribute to your retirement (so . .things like renting the property from your SMSF are out).
- Be clear about the name of the purchasing entity – the correct name needs to be listed on the contract.
- The property must be a 'single acquirable asset' which means the acquisition must be on one contract.
- When using borrowed funds, an SMSF cannot improve the property, it can only repair it.
- If the SMSF borrows to purchase a house, the SMSF can still use 'non-borrowed' funds within the SMSF to make repairs or renovate.
- If the SMSF property is purchased using money accumulated in the SMSF (no borrowings), then there are no restrictions on renovating the property. Of course, use caution to ensure your renovations are completed to market standard – don't overcapitalize.
- Apart from commercial property which has a different set of rules, the acquisition must be made at arm's length and transacted at market rates.
- Get finance pre-approved and take the time to understand the specific rules about contributions.
- Even the so called experts seem not to know how SMSF structures and finance can work. Ask your financial planner / accountant / broker how many SMSFs they have set up, how many properties they have purchased with borrowed funds, and how many times they ran into difficulties.
- All the usual property acquisition decision making criteria should be utilized – eg – demographics, vacancy rates, rental return, multiple exits – during the selection process.
- NOTE – don't expect to be able to draw against the equity from property in your SMSF. Unlike property owned outside an SMSF structure, you cannot obtain a loan against the improved value of the SMSF property. If you need / want to access the equity, you will need to sell the property . . .and make sure you obtain advice about this, because you can't sell your SMSF property back to yourself, a related party or entity.
Put It To Work
Consider your options and do your numbers. SMSFs can be an expensive nightmare if used incorrectly, however with a little effort you will be well on the way to owning a source of continuously replenishing income. Choose your property targets wisely and you won't have to deal with the issue of running out of money before you run out of life.
PS : Professionals require a Real Estate Licence in order to legally provide you with advice on property, so check your advisors' qualifications before you make any solid decisions.
Author: Debra Beck-Mewing
Debra Beck-Mewing is the Founder and CEO of The Property Frontline. She has more than 20 years' experience in buying property Australia-wide, and is skilled in helping buyers use a range of strategies including renovating, granny flats, sub-division and development. Debra is experienced in identifying tailored opportunities, homes and sourcing properties that have multiple uses. She is a Qualified Property Investment Advisor, licensed real estate agent and also holds a Bachelor of Commerce and Master of Business. As a passionate advocate for increasing transparency in the property and wealth industries, Debra is a popular speaker on these topics. She is also an author, podcast host, Editor in Chief of Property Portfolio Magazine and participates on numerous committees including the Property Owners' Association.
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Disclaimer – This information is of a general nature only and does not constitute professional advice. We strongly recommend you seek your own professional advice in relation to your particular circumstances.