Purchasing property with your Super
IN MY opinion, purchasing property with your superannuation has been made deliberately complex by the Government to ensure that our important superannuation funds are not frivolously wasted away and we do not use this alternative investment method as a vehicle for tax avoidance.
I will add, I do believe the reasons for its complexity make economic sense.
Acquiring residential property using your superannuation is not an easy process, nor is it the right choice for everyone. If you’re considering it, you need to seek professional independent advice from the start.
Over recent years, I have discussed this topic with many professionals, industry experts and had personal experience of the process.
Here’s a few of my observations:
Your current fund balance: From what I can gather, unless you have at least $250,000 to $300,000 in your superannuation – that can be you and your partner’s balance combined – it is not an option worth pursuing.
Costs: It’s not cheap – expect to spend $3000 upwards on establishing your Self-Managed Super Fund and then several thousand more in other fees. Further, there will be added costs as your fund has to be audited annually.
Keep away: You cannot live in the property, rent it to your family, or holiday in it. And you cannot buy a property from a member of the fund or an associate of any member.
Advice: The only place to go is an independent professional, accredited and licensed accountant. Yes, you will pay for this advice, but they should get it right and should have an unbiased view. I also suggest
going to the bank directly and shopping around for their terms. Not only can they help you with the loan, but also create an account to hold the funds. Bare Trust: This form of trust is created as a SMSF is not allowed to borrow money. This is a complex part of the scenario and you do need to discover more.
Limited Recourse: This is a critical term you will hear in your investigations. If your property purchase does not perform as planned and for whatever reason, perhaps rental income or holding costs mean a shortfall every month; guess who has to make up that shortfall? You! Also note the bank may want you to guarantee the loan.
One at a time: Every time you purchase a property, a separate Bare Trust has to be established with all the associated costs and liabilities.
Lender criteria: Rates are typically higher and loan establishment fees are generally always charged. The size of the deposit is generally a minimum of 20 per cent and it will be insufficient to have only the deposit amount in your fund.
Add in general purchasing costs and SMSF fees; along with the fact the bank will require a certain percentage of your fund to remain outside the property purchase and rental income must be sufficient to cover that lender’s pre-set requirements.
While this super investment option is initially an expensive and complex one, once established, your SMSF and the property could be a perfect match for you over the long term.
But please research, get the right advice and create your SMSF, before you start your property search.