For those with a Self-Managed Super Fund (SMSF), the investment options are vast and potentially lucrative (if you know what you’re doing). A fairly common strategy for growing your wealth through superannuation is through property investment. Not only can it provide a way into the market where one may struggle using more traditional means, the outcomes may be more tax-effective in the long run as well. Of course, there are a number of important considerations around SMSF property investment, including some things to be wary of and knowing what to have ready to go before you take the first steps.
Balances and borrowing
Typically, your self-managed super fund will need $200,000 before most financial institutions will lend to the fund. Borrowing to buy property in superannuation isn’t something new, in fact the rules were introduced on this in September 2007. Borrowing within a SMSF can be incredibly cost effective and tax advantageous, but there are tricks and traps.
Getting the documentation right from the outset ensures the transaction is compliant with relevant legislation and regulations, and goes a long way to saving some nasty surprises down the track. Common sticking points can include something as simple as having the correct wording on the offer and acceptance. There are also limitations on renovations as the fund cannot borrow to improve the property, but can borrow to repair it. Another important consideration is that the property cannot be subdivided before the loan is repaid.
Is property investment with your SMSF really that tax effective? Absolutely. For an individual earning $77,000 per year and then receives $10,000 rent, they pay $3,450 tax on the rent – leaving $6,550 in hand. That same $10,000 rent in the SMSF pays $1,500 tax leaving $8,500. Where the property has been held for longer than 12 months, the capital gains tax is reduced from 15% to 10%. Once trustees commence superannuation pensions for the members the capital gains tax can often be reduced to 0%. These considerations and more are what makes this such an attractive prospect for those with a self-managed super fund.
Residential vs commercial
Many superannuation funds diversify their property investment into both residential and commercial real estate, often for very different reasons. That said, one of the most common reasons to invest in property is to operate a business from that property. The current legislative landscape allows SMSFs to buy commercial real estate and operate their business from that same property, the fund can even buy the property from the members of the fund. In stark comparison, SMSF’s cannot lease residential property to members and relatives, and one certainly cannot acquire residential real estate from members or relatives. There may also be generous capital gains tax concessions available when commercial property is acquired from the members.
Be aware of the markets – both short and long term
Generally speaking, property investors get into the market to ultimately turn a profit. The property market can show a short-term upturn, appealing to prospective investors, but then turn around within a few years and the investment eventually turns out to be less than stellar. Similarly, buying a property in a market that looks fairly mediocre at the time could potentially become a lucrative investment within a relatively short amount of time. As such, it is crucial that you understand the market into which you are entering, and consult with relevant data and property specialists to get the best insight into long-term forecasts. After all, property investment is a long-term game, so be sure you’ve given yourself the best shot at success by looking beyond the immediate future.
Watch out for potential hazards
Other than the aforementioned lack of long-term thinking, there are a few notable hazards to consider when looking at using your SMSF to invest in property. A major one is that the risk you take getting into property investment extends to your retirement fund. As the larger point of a super fund is to provide you with money once you cease working, massive losses in property investment can reduce the amount you have left in your SMSF.
The bottom line is to be prepared. Do your research, don’t borrow beyond your means, and ensure you get the best support team around you – including superannuation specialists, financial advisers and property experts.
Wrapping your head around the intricacies of Self-Managed Super Funds and how they can help you invest in property can be confusing. For more information or to arrange a consultation, contact McKinley Plowman today on +61-8-9301 2200 or visit www.mckinleyplowman.com.au.