Using your super to buy realestate

By Nathan Free

Clients are coming to me every week asking if they can purchase a property with their super balance, and in most cases the answer is yes.

Minimum Balance

The only way to purchase a property in super directly is through a Self-Managed Super Fund, and before starting an SMSF you need to make sure your super balance sufficient. Depending on who you listen to you will be told you need a minimum total balance of between $200,000 to $300,000 to start an SMSF, and you can start one as an individual, as a couple, or as a group of up to 4 members.

If the sole purpose for setting up the SMSF is to purchase a property you can very simply work out your minimum balance as long as you know how much you want to spend. So if you want to buy a $600,000 property you will need:

• Deposit of approximately 20-30% of the property value, so that’s between $120,000-$180,000.
• Victorian stamp duty would be just over $31,000.
• You will not be able to borrow to make improvements to the property but you should set aside some emergency funds for repairs, let’s say $20,000.
• Finally you should set aside some funds to cover interest repayments in case the property is untenanted, $12,000-$14,000 should cover you for 6 months.

That’s a total minimum of $185,000 to $245,000. There are other factors to consider here such as how much will be contributed into the SMSF on a regular basis (eg. Compulsory Employer Contributions), what the potential income will be from the property, and the type of tenant the property will be leased to.

Pros and Cons

OK so you have enough money to purchase a property in super, what are the advantages and disadvantages?:

Advantaged	Disadvantages
Ongoing Costs – with ongoing fees around $2,500 per year this can potentially be a lot cheaper than retail and industry fund fees depending on your balance (for balances below $250,000 this starts to become a disadvantage).	Establishment Costs – to correctly set up your SMSF and prepare it to purchase property your upfront costs will be circa $5,000.
Tax: CGT – On the sale of a property profits will be taxed at less than they would for an individual, and potentially at 0% if the SMSF is in pension phase at the time of sale. Income Tax – Income is taxed at 15% instead of your marginal tax rate.	Tax: Negative Gearing – You cannot offset losses against your non-super income.
Using super instead of saving for a deposit	Stricter lending criteria
Limited recourse borrowing means that if you default on your loan the bank can only repossess the property that you purchased, all other assets are protected	Higher interest rates
Freedom of investment choice with your super	You as trustee are responsible for complying with the super and tax laws and can be liable for fines and even jail time if you breach your responsibilities. Further the use of your property is limited by the sole purpose test.
Taking a mortgage to purchase an investment is a form of gearing, and this has the potential to magnify any profits and boost your retirement savings.	Gearing also magnifies losses in a market downturn. Also in the event that you do sell your investment for a profit your money is locked in super until you meet a condition of release.

 Growth and Income

More than 1 million Australian’s negatively gear their investment properties, therefore many individuals buy new apartments that are cash flow neutral once the tax advantages of buying off the plan are taken into account.

However when purchasing in super you cannot offset losses against your income, therefore you need to find a higher yielding property in order to achieve the same cash flow neutral position.

When you sell an investment property if you have held it for more than 12 months 50% of the capital gain will be taxed at your marginal tax rate, however when purchased in an SMSF capital growth is only taxed at 10% after 12 months, or if you hold the property until you can convert your SMSF to pension phase the profit is tax free.

Therefore the key strategy for selecting a property to purchase in super should be to invest for capital growth, typically this can be achieved by purchasing land ideally with a house or a townhouse, as opposed to purchasing apartments.

Investment Protection

When you borrow to invest in property through super the financial demands on your super are significantly greater than if you were to simply invest in a managed fund through a retail or industry fund super plan. Therefore protecting the money that you are contributing into super from your salary needs to be a priority.

With an income protection plan you can not only protect your monthly income to maintain your ability to make your home mortgage repayments and meet your monthly living expenses, but you can also fully cover your superannuation contributions.

Professional Network

When you embark on a strategy such as this you will be relying on a range of professional advisers, therefore its so important to ensure that you are working with quality professionals, and there can be advantages to engaging a network of professionals who have worked together before so that things can go as smoothly as possible.

• Financial Adviser: Your Financial Adviser will work with you to develop an investment strategy for your SMSF and they can provide advice on gearing in an SMSF which is often a step that is required to be completed before a bank will lend you any money. A good Financial Adviser will project manage the whole process and assist you with managing the rollover of your other super balances. Finally an independent Financial Adviser will be able to advise you on appropriate levels of insurance and broker the best deal with one of the many insurers in the market.
• Accountant: An accountant or a lawyer is required to establish the appropriate entities that will form the foundation of your SMSF. You will also need an accountant on a yearly basis to audit your SMSF and do the tax return.
• Mortgage Broker: Lending to a SMSF is not your typical loan, that’s where it is best to use an independent broker to get you the best deal and manage the implementation process for you.
• Property Expert: As the buying criteria for purchasing property through an SMSF is so specific it is important to take the advice of a property expert who can ensure you are buying a property that ticks all the boxes.

Good Luck in Buying,

Nathan Free

Financial Adviser

Fortnum Financial Advisers

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