Taking control of superannuation is something many are considering seriously right now. With the share market’s recent rollercoaster rides and the worst plunge in 30 years in superfunds due to the pandemic, it’s little wonder. Cutting ties with your fund and self-managing via a SMSF (Self Managed Super Fund) has never looked so attractive. It can be an excellent option if done right with professional advice, and moving into property investments and away from share market volatility is worth considering. However before we leap in to SMSF property investing, let’s consider why it’s a good idea.
Superfunds are taxed at 15%, this is much lower than tax rates most people would receive. Capital gains tax, which can be the ‘bugbear’ of many people when they sell an investment property, can also be discounted when using an SMSF.
Favourable borrowing structures
Limited Recourse Borrowing Arrangements (LRBA) allow SMSF trustees to receive the interest in their purchased asset, while the legal ownership is held in trust. Using a trust arrangement means your entire superfund is not at risk in the event of a loan default. Debtors are also restricted in how they recover funds.
Purchase property beyond what you could normally
Using an SMSF unlocks your superannuation balance for self-managed investing. This can allow you to access more funds than previously, and can also allow you to borrow against your amount in order to achieve your property portfolio aspirations. Many SMSFs invest in commercial property, which is something small investors outside of an SMSF with less capital typically would not explore.
Now that you know the benefits, let’s look at how to get started with the basics of SMSF property investing!
First – know the rules
There are strict guidelines to SMSF property investing you need to follow. You’re only allowed to invest if you comply with them, and these are noted below.
The property must:
- meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- not be acquired from a related party of a member
- not be lived in by a fund member or any fund members’ related parties
- not be rented by a fund member or any fund members’ related parties
Do bear in mind that if your SMSF buys a commercial property, it can be leased to a fund member, however it must be leased at the market rate and follow specific rules. To view what the ATO says, go here.
Second – get a plan, then act
Before starting ask yourself:
- What your goals are.
- What is the time commitment each month that you’ll need to manage it, and if you are time-poor, consider if you will need external assistance.
- What your starting capital is (keeping in mind SMSFs need at least $200k to be viable, as well as being able to borrow from a lender for your fund, which can be important).
- What property type you will want in your portfolio – being mindful that you cannot live in or personally rent any residential property in your fund (or allow individuals known to you), whereas commercial properties can be utilised at ‘arm’s length’ with market rent by members’ businesses and those more known to you.
- What responsibilities you need to understand first
- What help you’ll need both to run the fund and formulate investment strategy
SMSFs that invest in property can be both lucrative and personally satisfying to watch as they grow. You can start small and add to a portfolio just as any typical investor would, and like all investments, time in the market and getting to know cycles, in addition to gaining knowledge, can reap big rewards. SMSFs also put you and other members in total control, and can be structured to ride out shocks in markets if correctly diversified.