Over the past decade, many Australians have invested in property via their superannuation funds.
One of the reasons they do this is because they want to have control over the performance of the funds in their super.
Another is it allows them to buy an investment property when perhaps they could not have otherwise.
However, to invest in property they must have a Self-Managed Superannuation Fund or SMSF.
On top of that, there are a number of rules and regulations that must be followed, which is why this is not a strategy that should be attempted without receiving professional advice beforehand.
Here are 7 things that you must know before you proceed.
1. Your SMSF must have an investment strategy
When buying property via your SMSF, you must have an investment strategy.
That is, the investment property, or properties, have been selected because they are investment grade and are in strategic locations with the best chance of superior capital growth.
The property must also pass a “sole purpose test” which essentially means it has been bought to provide retirement benefits to fund members.
2. Your SMSF can borrow to purchase a property
An SMSF is an entity in its own right, separate from the trustees or you personally.
That means that it can borrow funds to purchase property via Limited Recourse Borrowing Arrangements (LRBA).
This also means that all funds for the property, including, say, a shortfall between the rent received and the mortgage repayments must be financed from funds within the SMSF.
3. Your SMSF can buy any type of property
SMSF’s can buy any type of property, including residential, industrial, or commercial property.
In essence, buying with your SMSF is no different when it comes to property selection than when buying via other ownership structures such as trusts or in your personal name.
However, to ensure you buy a property that outperforms the market, savvy investors work with experts to ensure they purchase the very best property they can for their budget.
4. Your SMSF can not borrow additional funds for the property
An SMSF cannot borrow more against a property it owns down the track, which means all property-related expenses must be financed from within the SMSF.
This also means that your SMSF can’t borrow funds to undertake development or major renovation on the property.
If buying a residential property, it can’t be from a related party.
Under the superannuation law, a related party is anyone who is a member of the SMSF.
That is, a member making contributions to the SMSF, a member receiving a pension from the SMSF as well as a member who has deferred their entitlements to receive a superannuation benefit from the SMSF.
However, an SMSF can buy business premises from a related party.
6. Family members and associates can’t rent it
Likewise, your family and associates are not allowed to rent or use the property if it is residential.
This rule is to ensure that the property has been solely bought with the intention of providing retirement benefits to fund members rather than buying a nice property for your adult child to rent from you.
However, this doesn’t apply to commercial premises, with many business owners opting to set up their offices or workshops in a property bought within their SMSF.
7. SMSF is not for everyone
While investing in your SMSF might seem like a simple enough thing to do, it’s not.
It has a number of expenses, such as auditing and complex accounting, that standard property investors generally don’t have to worry about.
Also, many people don’t have enough funds in their SMSF to undertake this strategy successfully.
That’s why it’s vital to get independent financial advice from an accountant with experience in SMSF investing long before you’ve started searching for a property online.
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Disclaimer
This article is general information only and is intended as educational material. Metropole Wealth Advisory nor it's associated or related entities, directors, officers or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice taking into account your circumstances and objectives.
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