How do I invest in property through my super?
On the back of the recent property boom, I’m often stunned that not enough people are aware that you can buy property in your super fund. And you can gear it, and you pay less tax or no capital gains tax, and you can renovate it. It’s one of the best-kept secrets in wealth creation!
If property is your thing, it’s truly a no-brainer for the right investor. That right investor is ideally a high income earner who may bring in more than $100,000 a year and has more than $200,000 in super and the ability to maximise their concessional super contributions of $25,000pa to repay the debt.
But don’t worry, the next best thing is that you combine your super with up to four family members, including your spouse, although most self-managed funds have just two members, and you can combine the balances and contributions to pool the assets and pitch in to buy a property.
Most banks will lend up to 80% of the value of a property, although I like to see properties being cash flow positive so I recommend a loan to value ratio of 70% or less. This means that the rent and super contributions can be lowering the debt, so by the time you retire you can repay the loan and either sell the property free of capital gains tax (if you’re over 60 and in pension phase, and under the $1.6 million pension transfer balance cap).
Now you’re all excited, let me help you get a grip. It’s important to point out that you need expert advice in establishing the structures and making the purchase. Importantly, you need to establish a self-managed fund with a corporate trustee, which will cost you around $1760 – the market rate – at my firm.
You’ll also need a second structure called a limited recourse borrowing arrangement (LRBA), also with a corporate structure that will cost around the same price – so about $3520 in total. For example, your super fund name will read Henderson Pty Ltd as trustee for the Henderson Family Super Fund, and you’ll have another company perhaps called Henderson Super Property Pty Ltd ATF (as trustee for) Hendo Property Trust.
Your fund will then buy the property in the name of the second trustee, or Henderson Super Property Pty Ltd. Simple, right? Well, sort of ... but it’s really important to select an SMSF expert who has done many of these and won’t mess it up when it comes to purchasing the property and talking to the bank.
While the banks have lending products for this purpose, my experience has been that they are kind of useless to deal with. It is therefore more important to have a good accountant who can tell your lender how to structure the deal.
Anyway, don’t lose faith because it’s worth the effort and extra cost because we’re going to help you repay the debt with super contributions taxed at only 15% instead of your normal 19%, 32.5%, 37% or 45%, and the tenant is going to pay off the rest of your debt if you structure things correctly.
As with all property, you need to do your research thoroughly, you need to understand we are very deep into (if not at the tail end of) a very positive property cycle, and you need to think long term. Avoid the spruikers and do your homework on cash flow. Importantly, you also need to understand that you carry the burden and cost (around $2500-$3000pa) of compliance in running an SMSF and you might pay around 1% more on the loan. Notwithstanding, for the right investor this can be a terrific wealth builder, as it has been for me and select clients (it’s not for everyone) over the years.