Looking To Buy Property Using Your Super?

Josh Masters

If you have decided that you would like to invest in property with your SMSF, you will need to ask yourself whether your Fund is healthy enough to finance such a purchase. Financing the investment can be broken up into two main elements;


a) “Setup” – funding the deposit


b) “On-goings” – meeting the loan repayments and maintenance costs  


 


The “Setup” Stage


1) How much do I need in my SMSF before I can consider buying property?


Although I have heard some advisors mention starting figures as low as $80,000 in order to buy property in your SMSF, most advisors recommend the Fund hold a minimum of $150,000 to $200,000 in order to invest in property safely and responsibly. There are a number of reasons for this level of funding, but the main ideas are as follows:


Diversification - As most investors will look at property starting from approximately $350,000, a minimum of $150,000 allows you to allocate a sizeable deposit to a property purchase, leaving you with sufficient funds to allocate to cash and equities as well.


Lower levels of debt – Where you may typically borrow up to 80% or 90% of the value of the property from a bank in the general market, most advisors and risk profiles would prefer you to lower your exposure to debt within your retirement fund, limiting the loan to 50% to 70% of the value of the property. The advantage of such a strategy is that it reduces mortgage-stress and allows you to hold the asset with a much lower year-on-year outlay. The disadvantage being that property investment in your SMSF may require a much larger deposit compared to the general market.


 


2) How much should I allocate for a deposit?


Again, this can depend on the financial advice you are receiving and the advisors appetite for risk, however there are also general market limitations on SMSF loans that you will need to consider. Loans to SMSF’s are considered “limited recourse” by the banks. This means that the bank is “limited” to seizing only the asset that the loan is attached to and cannot gain access to other assets you may also own. As a result, lending institutions have a limited range of products for SMSF’s, some ranging as high as 80% but many peak at 70% to 73%. This means that for a purchase price of $500,000, a minimum of $100,000 should be considered as a deposit, plus costs.


 


3) What if I don’t have the funds for a deposit?


Buying property through your SMSF can be a very tax-effective way to build a property portfolio, so if you don’t have the funds for a deposit straight away you may want to consider lending the deposit to your SMSF rather than miss out. How does this work? Although the funds inside your SMSF belong to you, the SMSF is actually a separate entity. This is an important distinction when you realize that you are allowed to lend money to your own SMSF. There is no limit to the amount you can lend and you can do so at an interest rate equal to or less than the “market rate” of interest. This means that if you don’t have the funds for a deposit inside your Super already, but you have access to savings or a Line of Credit, you can lend the SMSF the funds it needs to purchase the property and it can repay you over a designated period of time. This may provide for a very tax-effective strategy for you outside of Super and can allow your SMSF to invest in property immediately.  


 


The “On-goings”


Stage 1) Do I have the funds to service my loan?


Many people find that they may not have been able to afford a property purchase in the general market, but because of their compulsory Super contributions they now have a portion of income that can go to paying for the shortfall between the rent (income) and the loan repayments (expense). As a general rule, 1% to 2% of the properties value is a good benchmark to use as an ‘out of pocket’ expense for the first 4 or 5 years on a property investment, at least until an increase in rent can compensate more effectively for the loan repayments and the ongoing maintenance and levies. Achieving a much higher rent return and contributing a larger deposit will reduce this cost dramatically though, so you should consult your accountant or planner to determine a number of scenarios that will suit your financial position.


 


2) Can I meet the repayments as I move into Pension Phase?


As you move into retirement the opportunity to service your investment loan out of your own pocket will decrease dramatically. If you have ventured into property at the end of your working career then it’s essential you have a plan for servicing the shortfall in your investment at least until the rental income has increased sufficiently to make the property cash flow positive. For a diagram showing the property timeline, please click here. If the thought of property investment within your SMSF does appeal to you, make sure you consult with your accountant and financial planner on whether such an investment will suit your financial circumstances. Considering both the setup and ongoing costs of a property investment is essential to making an informed and educated decision and making allowances for these factors will put you in a superior position when you do decide to invest.