SMSF Direct Property

Interested in purchasing property with super?

With the large public offer super funds annual statements hitting mailboxes at the moment, we frequently see a spike in clients looking to set up a self-managed superannuation fund (SMSF) to take control of their retirement savings.

Generally there are a few reasons why clients look to establishing an SMSF:

  • A close friend or colleague has done so and recommended it to them
  • Disappointment and frustration with the lack of return/growth in the the public fund
  • High fees and little service
  • Desire to purchase an investment property

One area that large public funds can’t compete with SMSFs is direct property. For those wanting to purchase an investment property through their super, then an SMSF is the only option. But, this is a highly regulated space when it comes to SMSFs and property, purchasing property in your SMSF is not a straightforward strategy.

Most often SMSFs are established to purchase an investment property with a loan to support the purchase. This market has changed significantly over the past few years, with a number of the large banks no longer providing these types of loans. As a result, there is now limited competition in the lending space, so you need to consider an interest rate that is well above standard residential lending rates.

Another option to avoid the higher interest rates, if you have funds in your personal name, you are permitted to provide a loan to your SMSF. The loan must comply with the ATO’s arm’s length lending and “safe harbour” requirements – buts its very possible.

Provided the numbers all stack up, and you can support the ongoing liabilities of the fund (including loan repayments), then you should have nothing to worry about – ideally you could “set and forget”. However, investing in property is never a smooth case.

Residential properties will typically need some repairs along the way. So you’ll need to budget for these unexpected expenses. Provided the work is standard repair or maintenance then you can use the existing funds in the SMSF to pay for the expenditure. You cannot improve or change the nature of the asset whilst it has a loan on the property.

So if you are thinking of developing the property, then this SMSF structure doesn’t really work for you. You would need to first pay-off the mortgage before any development could take place. But the hard part is getting sufficient funds into the SMSF for the development. You can make personal contributions, however these are subject to annual caps, which may restrict the development. It does get complicated, so best to speak with us if you are considering such a project with a SMSF or otherwise.

If you need to take out a loan to fund the property or vacant land purchase, then it’s best to park your property development ambitions and look at alternative options outside your SMSF.

Another question we often get asked is: “can I borrow against the first SMSF property to purchase the second one?”.

The short answer is No. You can’t use the other assets of the fund as security for a second property loan. You must have sufficient cash deposit towards the second purchase, typically 20-30% of the valuation.

We have setup and assisted many clients in purchasing direct property in their SMSF and experienced first-hand the accelerated growth this strategy has shown, but its not for everyone. It is important to consider your own circumstances and whether its in your best interest.

If you are interested in SMSFs and learning more, please contact our office to setup an appointment with one of our financial planners.

No Advice Express or Implied: The contents of this website are of a general nature only and have not been prepared to take into account any particular investor’s objectives, financial situation or particular needs. THE BUSINESS EXPERTS does not provide financial product advice or recommend any financial products either expressly or implied.