Many Australians are looking to invest in real estate via their superannuation, combining the growth potential of Australian property prices and the generous tax concessions available to super funds.
But with so many rules and regulations and misinformation, it can be a little overwhelming for some people causing them to put it in the “too hard basket”
Here we will go over the basics
To begin with, you will need a Self-Managed Super Fund (SMSF) in order to be able to do that.
However, this requires a great deal of preparation to ensure that the various SMSF regulations are met, and as such it’s not best for DIY types, although there is nothing stopping you, it’s much safer to engage a licensed Financial Planner who can set it all up to comply with the law.
Accountants used to do some of this work, but recent changes to legislation has meant many are now referring their clients to specialists like Liberty Strategies.
Benefits of property investment with an SMSF
The major benefit is that you are able to “gear” your super fund by using property instead of equities.
That alone makes it great investment for many people
Australian property has a proven track record as a solid performer and ‘bricks and mortar’ offers a more stable investment option than the share market.
You also have complete control over your property than you do with, say equities.
The rent from an investment property generates the additional income stream enabling you to grow your portfolio.
Income from rent, and/or income from the SMSF can be used to repay the loan for the property
SMSFunds can use negative gearing to claim a deduction for borrowing expenses, just like individuals.
But an SMSF is not allowed to purchase the Property directly where borrowings are used, it will need to set up a separate holding trust, typically referred to as a Bare Trust or Security Custodian Trust, which will be the legal owner of the Property.
To purchase the property, the SMSF can use the money it has available in cash and borrow the remaining funds plus all the other costs, using the residential property as security just like in your personal mortgage.
Whilst the security custodian trustee will actually purchase the Property it is the SMSF who will borrow from the Lender to fund the Property purchase and receive the rental income.
The rent can be used by the SMSF trustees, to make the loan repayments. Once the loan is repaid the legal ownership of the property can be transferred to the SMSF.
It’s important to note that the loan is a limited recourse loan. This means in the event that the SMSF defaults on the loan the bank/lender can only claim or sell the actual property involved, and cannot touch the other assets belonging to the SMSF .
There are many internet DIY SMSF websites that offer education and online DIY SMSF’s , however keep in mind that…
……..the rules and regulations governing SMSF’s are constantly changing and it can and does get very complicated.
SMSF loans are also very complicated. Failure to correctly implement the arrangements can result in a breach of superannuation laws. This could mean that your DIY SMSF is not compliant, which could result in heavy tax penalties or even criminal proceedings for the trustees.
So think very carefully before you proceed the DIY route.
This is not the place to compare costs and “save money ”
You want the job done right !
Liberty Strategies can take care of the whole process and will guide the trustees through the entire setup process to ensure the process from start to finish is done correctly.
Do You Need $200K To Buy Property?
The short answer is no , that’s just a myth, how much do you actually need?
The answer is different for everyone, there’s no one size fit’s all solution in the financial world unfortunately.
A free consultation with our financial planner can advise on how much you will need, he can also point out the other benefits, legal responsibilities and restrictions of buying a property with your super fund and how to finance it.
We also provide an estimate of the costs and taxes associated with investment property ownership.
Liberty Strategies can locate the right property, arrange the finance and provide a complete “done for you” SMSF property service.