Property and superannuation are two of the most important assets when it comes to looking after your long term wealth, so its unsurprising that so many Australians have started to try and combine both.
Establishing a self-managed superannuation fund (SMSF) and using it to buy an investment property has become a popular option in Australia, yet it ignores fundamental rules about investing such as diversification and consideration for debt. So while the growth of SMSF’s can be put down to more Australians wanting to take charge of their own retirement money, it can also be strongly linked to the love affair Australian’s have with real-estate and finding another way to acquire more of it!
However, the practice of setting up an SMSF purely for the purpose of purchasing an investment property is not necessarily the right option for everyone, especially when consideration is given to changes in lending practices, and the possibility of having 100% of your retirement savings in one asset class, and possibly even just a single asset….
There are some other very fundamental reasons that this will not be the right option for everyone, so before taking the plunge, here are a few tricks and traps that are worth considering when it comes to purchasing property via an SMSF.
First, unless you have enough money in your SMSF right off the bat, you will need to borrow money for your fund to purchase a property. Here’s where it can get tricky.
First, any money your fund borrows from the bank will actually count against your own serviceability for future loans.
So if you borrow $300,000 for an investment property within your SMSF, a bank will take $300,000 off their calculations of your serviceability if you attempt to borrow outside of super for a family home, investment property, business or car.
Once you have borrowed within super, you can only make repayments using 9.5 per cent of your income (your contributions to superannuation), plus any rental income generated by the property.
If you are also thinking about purchasing property in a nice tropical location and holidaying there, or letting friends and family members rent it from you, think again. You and your associated parties are prohibited from making use of the asset until you reach retirement age. Basically, although you can manage the investments made by your superannuation, the assets are there for your retirement and if you try to pull a number on the ATO, they will pull even bigger numbers on you, in the form of enormous fines and other penalties. These rules extend to all asset classes in SMSF investing. If you invested in a rare painting or artwork for example, you wouldn’t be allowed to display it in your home until retirement.
However, should you be considering setting up an SMSF, or have done so already with a view to investing property, remember at CFMG Capital – we believe there is a key difference between investing in property, and purchasing an investment property, as highlighted in our article in November 2017.
Some of those key difference are easily summarised here:
Investing in property
- Low entry point (eg, just $25,000)
- No requirement for debt
- Passive or active opportunities
- No tenants, no agents, no maintenance
Purchasing an investment property
- At least 10% deposit required, but usually 20% in the current investment lending market
- Additional debt/mortgage
- Managing agents, maintenance and tenancies
- Landlord insurance
So if you believe in residential property as a strong and stable asset class like many Australians, consider investing in the CFMG Land & Opportunity Fund where you can gain risk managed exposure to residential property under the following terms:
- $25,000 entry level
- Fixed 12% returns per annum (net of fees)
- Fixed term investment structure
- Ability to diversify