The popularity of self-managed superannuation funds (SMSFs) has soared in recent years. But – how do you know if a SMSF is right for you?
I would say there’s no hard and fast rule but those who want control over how they want to invest are probably more suited to a SMSF. There are people who have an interest in property or want to purchase their own business premises, these people have a greater level of financial literacy and understanding in investing. Then there are others who might not want to have active involvement in their investment choice but who may be better off having a SMSF because the amount they have to invest can actually allow them a more cost-effective solution.
A SMSF can have up to four members, all of whom are Trustees of the Fund. As Trustees, all members are personally liable for all the decisions made by the fund. As such, there are additional responsibilities that come with having a SMSF structure and it’s important to ensure that you understand and are aware of those responsibilities.
In terms of a minimum amount to invest, $100,000 is a dollar figure that will allow an investor to purchase an investment property and leverage at the same time. You will need a financial advisor in most cases to give you an investment strategy and approve of the strategy you wish to undertake. Either Financial Advisors or Accountants will be able to establish the SMSF for you.
How much you can leverage in an SMSF depends upon the size of the fund, the contributions going into the fund, the income derived by the funds assets such as rental income and the cost of the property. At present some lenders have been lowering their loan to valuation ratios for residential property in SMSF to 70%, but we still do have access to a few lenders at 80% lending ratio. It must be noted that these ratios apply to major metropolitan areas, if you are purchasing in outer or regional areas, these ratios could drop to between 50-70%. With commercial SMSF property transactions it is still possible to lend to 65-70% loan ratio and a couple of lenders will still consider rural transaction’s within an SMSF environment.
For a property investor, a great benefit of SMSF is that your serviceability may be maximised outside of superannuation and so an SMSF allows you to continue to invest and build your portfolio. A recent example I saw was a client had just purchased an investment property outside of super and didn’t have enough savings or equity available to purchase their next property. They spoke with their financial advisor who said they could roll their $274,000 superannuation into a self-managed superannuation and continue to invest from there. I worked out they could afford two purchases straight away within an SMSF environment.
If you are considering an off the plan investment purchase, I would be careful as ratios are changing, I would recommend organising a pre-approval upfront if possible or at least ensure you have excess funds in your SMSF, if the lenders change the borrowing ratio further and/or the valuation is lower come settlement time.
Gearing property within an SMSF may not be right for you if:
- Your SMSF fund balance is less that at least $100,000.
- You are not a very sophisticated investor and are not wanting to actively manage your investments in a superannuation fund
- You are within 10 years of retirement.
- You are wanting the property for personal use between now and retirement.
- You don’t clearly understand your duties as a SMSF trustee.
- You don’t want to use a Financial Advisor to help you with strategy
If you would like an overview of your purchasing potential within an SMSF environment, contact Stephen McClatchie from Loans Australia now on 1300 855 430 or www.loansaustralia.com.au . Loans Australia are the creative financing specialists for smart property investors with 2 to 29 properties, who want strategic financing solutions for ongoing property acquistions.