Buying your next investment property through your SMSF
Is it a good idea to buy your next investment property through your self-managed super fund? As with most investments, there are always pros and cons to any decision you make about where to spend your hard earned dollars. I always say due diligence and research are the keys to any good investment decision. There are many experts out there who will offer advice, be wary of those who have something to gain by selling you a particular product. Below are some points to consider that come from the ASIC website.
You can only buy property through your SMSF if you comply with the rules.
- Must meet the 'sole purpose test' of solely providing retirement benefits to fund members
- Must not be acquired from a related party of a member
- Must not be lived in by a fund member or any fund members' related parties
- Must not be rented by a fund member or any fund members' related parties
However, your SMSF could potentially purchase your business premises, allowing you to pay rent directly to your SMSF at the market rate.
Geared SMSF property risks include:
- Higher costs - SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
- Cash flow - Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
- Hard to cancel - If your SMSF property loan documentation and contract is not set up correctly, unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
- Possible tax losses - Any tax losses from the property cannot be offset against your taxable income outside the fund.
- Cannot borrow to improve the property - Borrowed funds can be used to maintain a property but cannot be used to improve a property.
If you decide to plunge into this market again either through your SMSF or borrow again to increase your portfolio, the following may be of interest.
The property market is slowly on the rise and is certainly not booming, so possibly a good time to buy. Interest rates are extremely low and look to remain so for some time. Budget for a rise or 2 in the next few years. Remember also that property is a long term investment and should be treated as such. Trying to recoup a profit in the short term invariably does not work. Some tips below may help you on your way.
Where to buy
- Think twice about investing in property markets you are not familiar with. In other words, be very careful if you invest interstate and are unaware of the area or suburb.
- Look for areas where high growth is expected, in other words where there is potential for capital gains. Property experts regularly provide tips on up and coming suburbs, just make sure you are aware of any biases they may have
- Look for areas where rental income is high compared to the property value
- Research recent sale prices to give you an idea of what you can expect to pay for property in the same area
- Find out about the vacancy rates in the neighbourhood. A high vacancy rate may indicate a less desirable area. This may make it harder to rent the property and may make it difficult to sell in the future. Our property managers can help you with this assessment.
- Research proposed changes in the suburb that may affect future prices. Things like planned developments or zoning changes can affect the future value of a property. Don't assume that last year's boom will continue this year. On the other hand, the right changes to an area can have beneficial consequences to the property prices in and around the development.
What to buy
- Look for properties with features that will appeal to as many people as possible, such as a second bathroom, lock up garage or somewhere close to shops, schools and transport
- Look for a property that will attract more than one segment of the rental market such as singles, couples, young families or retirees
- Low maintenance costs are important so watch out for the timber houses or acreage properties just to name a few.
- Units can be easier to maintain than houses, although you will have to pay body corporate fees