Tips for Buying Property with a SMSF

With investment returns in Superannuation being quite disappointing over the past few years, many Australians are looking to take control of their Investments via a self managed super fund (SMSF).  So before you jump into this space here are a few Tips for Buying Property with a SMSF. 

 On average, a property held within Super for 20 years will be 35% more profitable than one held in your own name 

SMSF magazine

How It Works

The concept behind purchasing property within a SMSF is quite simple. A property is purchased in the name of the super fund using money from the fund, and all rent from the property is then paid back to the fund.

A SMSF is able to invest in a range of property including residential, commercial, industrial and retail. There are however a number of restriction which apply to property investment, each of which will be covered further in this guide.

In the past a SMSF could only purchase property using its own funds, which meant that the super funds of many Australians were not large enough to support such a purchase. Today however a SMSF can borrow money, which has opened up the property investment option to many more people.

What are the Benefits

For many Australians, SMSFs offer 4 major advantages:

  1. You have more control over your investments.
  2. You have greater investment flexibility.
  3. Generally lower fees than industry and retail funds.
  4. On average, better performance than industry and retail funds.

There are strict rules governing what money borrowed through an SMSF can be used for.  Now though the rules allow for property to be purchased through a SMSF and the fund can even borrow to invest in property.

Some of the potential benefits of buying property through a SMSF include the fact that the fund will pay a maximum 15 per cent tax on rent from the property.  On properties held for longer than 12 months, the fund also gets a one third discount on any capital gain it makes upon sale.  The remaining two thirds are then added to the fund’s income and taxed at the funds rate of 15 per cent, effectively providing a ten per cent tax rate.

Also, once fund members start receiving a pension at retirement – assuming they’ve held onto the property this long – they’ll pay no tax on either rental income or any capital gains tax when they sell.

Investing in property this way also puts people in control of how one of their biggest assets, superannuation, is invested. It’s little wonder that it has become a very attractive and popular way to save for retirement.

But, like anything in life, people need to go into the arrangement with their eyes wide open.  For example, depending on whether a person would be making a taxable loss or gain with an investment property, and factoring in what their marginal tax rate is, they may be better off holding a property investment outside of super.  It all comes back to looking at what’s best for the individual and their circumstances.


The Do’s of property investing in a SMSF

Building a successful property portfolio to fund your retirement is not a matter of luck (except for a very small minority) and will require a commitment to, at the very least, do the following:

  • Adopt a professional approach to investing in property
  • Carefully research the property market
  • Ensure you are claiming your full investment property tax entitlements
  • Spend time planning investments and consulting with tax advisors
  • Seek advice from your tax advisor about the best structure for your investment loan to ensure that you are legally maximising the tax deductibility opportunities of the loan
  • Seek advice on the tax depreciation schedule for an investment property and how legally maximising the claims on the tax depreciation benefits that you are entitled to can assist your cash flow and can assist you to buy additional investment properties sooner rather than later.
  • Conduct a full assessment, or seek the services of a tax advisor specialising in property investing to conduct a full assessment of the true cost of buying and holding an investment property to ensure that there are no unexpected additional costs which will eat into your cash flow and limit your buying power.
  • Ensure you buy a property in an area that is attractive to tenants as properties not located in close proximity to shops or transport generally have higher vacancy rates and lower rents.

The Don’ts of property investing in a SMSF

In choosing to enter the investment property market for the first time with a view to building a successful property portfolio to grow wealth and comfortably fund your retirement, at the very least, you must not:

  • You must not become personally and emotionally invested in your property purchases as it must be implemented from a commercial perspective.
  • Do not buy an older property that can drain your finances through maintenance costs.  New buildings can come with a builders’ warranty and older properties tend to have less attractive tax depreciation benefits.
  • Do not buy in an area where there is an oversupply of properties.  Rents will be low and capital growth will be limited.  Without capital growth you may not have enough future equity to use as security to purchase additional properties.
  • Do not manage the property yourself.  To adopt a professional approach to your property investment strategy it is highly recommended that you engage a professional, reliable property management company.  First time investors who experience a bad tenant will be tempted to sell their property rather than continue with their property investment wealth building strategy.
  • Do not buy an investment property with the view to a quick return.  An investment property should be viewed as a long term investment and a stepping stone to purchasing a portfolio of properties that will fund your retirement.
  • Watch out for properties that may be overvalued or have artificial rental returns built into the purchase price that cannot be sustained over the long term.  In particular, be extremely wary of property investor spuikers.

With something as important as the money you hope to retire with, it’s worthwhile researching any retirement strategy thoroughly and seeking independent advice before deciding if it’s the right choice for you.

At Success In Property we have a specialist SMSF advisers who can assist you to determine if a SMSF is right for you.  We can also help you with selecting the best Investment properties designed to meet your Financial Goals.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *