How do I in­vest in prop­erty through my su­per?

Money Magazine Australia - - COVER STORY -

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.

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