Using a Self-Managed Super Fund (SMSF) to invest in Property
If switching to a SMSF and investing in property is the right strategy for you and your long term goals, properT network can guide you through each step of the journey for the life of your fund
Get started by registering with us, we will help you understand the advantages of property investment in your SMSF and why so many Australians are switching to SMSF. Whilst you take advantage of your ability to Leverage your investment strategy, give yourself Choice and Direct Control of your Super destiny and take advantages of effective tax planning
Why set up your own Self Managed Super Fund?
Industry funds dismal long term (lack of) Performance
Industry Funds results from 1996 to 2010 : corporate funds on average provided returns of 5.84% pa;industry funds 5.35% pa;public sector funds 6.30% pa; and retail funds 3.66% pa. “Ask yourself how does this help you create sufficient retirement income?”
More than 150 of the growth funds tracked by Morningstar have not earned more than 3.5 per cent a year — or 1 per cent above inflation — over the past decade. These funds contain about $16 billion of workers’ retirement savings.
Thirty-three funds have delivered average investment returns of 5 per cent or more for the past 10 years, including some of the biggest funds.
In your industry fund, not only are you achieving dismal long term performance results on your own retirement funds but if you have $125,000 in your current super, ONLY this $125k is working for you!
Wouldn’t you prefer to take advantage of the power of Leverage; whereby you invest say only 20% of the value of the property and have the bank and a tenant fund 80% of the investment meaning you now have an Asset of over $500,000 working for you in your own SMSF and you only invested around $100k for the privilege
Compounding Returns on Investment
Compounding Returns comprise of Interest being earned on top of Interest for the life of the investment; the longer one invests this higher a compounded return will be … we agree
Based on the above returns of 5% pa, such an account would have grown to $140,000 today (after-fees investment return) but if the return was 3 per cent, the balance would only be $121,000
What if you set up a SMSF and secured a prudent investment property which generated a return on investment of 10%pa; can you imagine the returns on your investment at a regular 10%pa versus industry averages of a dismal 5% pa?!?
How will a 10% compounded over 10 years or more positively effect your retirement lifestyle?
*This is not rocket science nor financial planning advice; merely using Logic and industry statistics
What is a Self Managed Super Fund otherwise known as a SMSF
It is a super fund established by you (plus up to another 3 members) for the sole purpose of strategising your own investments to provide you with maximised retirement benefits
Having your own SMSF allows members to take control of how and where their super funds are being invested. Where investment decisions are made by the trustees implementing investment strategies to suit the individual members of the SMSF
SMSF’s enjoy the same financial benefits of Industry or Corporate Super Funds but have the added advantage of being able to borrow from the bank to leverage your investment potential. Example is investing in a property one can borrow up to 80% of the value of the asset whilst only physically investing 20% to give you return on your investment based on 100% of the property value
Set up your SMSF first
One cannot secure a property prior to having a SMSF set up and if there are borrowings having the Bare Trust in place first
Prior to setting up the SMSF speak to your professional advisor to ensure you have an understanding of pro’s and con’s, your responsibility and obligations as trustee, upfront and ongoing costs etc
On choosing to proceed follow your professional advisors steps to setting up the SMSF, action that funds be rolled over from your industry fund and begin implementing your planned investment strategy
With SMSF’s becoming the biggest asset class in Australia, thousands of Australian investors are using their super monies to invest in property; primarily to take control of the Super Destiny + have the ability to Leverage (ability to borrow funds) and take advantage of compounding growth returns.
Investing in a Property in your SMSF
One can secure Commercial and or Residential property in a SMSF with certain provisos
Such as in residential property it cannot be used as a holiday house, primary place of residence and should only be purchased solely for Investment Purposes (always being at arm’s length from members of the SMSF)
As stated above a major investment advantage is having the ability for the SMSF to borrow funds up to 80% of the value of the property for the investment
- Property Value $500,000
- Invest $100,000 + costs
- Borrow $400,000
- Achieve a return on your investment on the full capital value of $500,000
- And you have only invested $100k
There are other rules around borrowings which control what you can and cannot do with a property such as make improvements or secure a two part contract such as Land then Build a House. Where no borrowings are incurred improvements or H & L are allowed
Tax Advantages of owning an Investment Property in a SMSF
A SMSF attracts a 15% tax rate. Rental income is thus taxed at only 15%
Capital Gains Tax in year 1 would be at a 15% tax rate after which it drops to 10% and in retirement phase no capital gains tax is payable on the sale of a property
Expenses such as Interest, Management Fees, Insurance, Rates, Body Corporates (all expenses associated to the property) are deductible to the SMSF
Depreciation benefits can also be deducted and if structured correctly against your annual SMSF premiums you are paying. Speak to your accountant on how to achieve and implement this strategy
Does one invest using Interest Only and have the ability to save further lump sums in your SMSF to secure a second investment property?
Employ the strategy to reduce borrowings (debt) and build as much equity as possible so that at retirement and if you hold the property your expenses will be lower and thus your rental income will be higher. Or if you choose to sell in retirement phase you will achieve a higher tax free lump sum at time of sale
One cannot buy a property before your SMSF is set up and documents are in place. If you do there are implications such as probable double stamp duties
Speak to your accountant to determine upfront the Set Up fees + ongoing annual fees associated with your SMSF
The SMSF will also pay the deposit for the investment property as well as other acquisition costs associated to the purchase
Choosing the right property which is well supported by the underlying numbers not only makes for a more sound investment vehicle but also minimises your SMSF requiring that you put in extra funds to fund any shortfall between rental income and expenses
As a trustee you may not put your SMSF into financial jeopardy thus selecting a property which makes financial sense (over emotion) is a prudent strategy in ensuring that your SMSF can pay for the investment. The loan will be a non-recourse loan protecting other SMSF assets from default
Where there are borrowings against the residential property one cannot renovate, make improvements or secure a two part contract such as buying Land and then Building a House on it
On wanting to purchase a 2nd or 3rd investment property and there are borrowings, a separate Bare Trust must be established for each new property purchased
One cannot utilise equity in your first property as security to borrow on your second property, each property must stand on its own financial merits
Where to from here
Once you have had your current financial situation assessed you will know if a SMSF (Self-Managed Super Fund) and investing in a property is the correct investment strategy for you and your other members
We will walk you through the many advantages of investing in property within your SMSF such as :
- The ability to borrow funds and Leverage your wealth building strategy using the banks funds + your tenants rent
- We will demonstrate how Investing in Property in your SMSF can be an effective strategy to compliment your current retirement planning in building long term wealth for you and your family
- Ability to create effective tax planning strategies ensuring tax free income or no capital gains after retirement
- Demonstrate how a SMSF can be passed down the line from generation to generation ensuring effective Succession Planning
For more detailed information on Self Managed Super Funds and Investment property click here
*Information shared here is of a general nature, seek personal advice from your professional or ask us for a referral onto a recommended professional