Buying Direct Property Using Your SMSF

Article supplied by The SMSF Club

Buying Direct Property Using Your SMSF

Property for many Australians has historically been one of the most successful ways they have accumulated wealth.

Investing in property is not rocket science, as most people have had prior experience either buying a property directly, or at least renting a property themselves. However, the rules for buying a direct investment property within super are a little different than buying a property in your own individual name.

While many Australians do have experience when it comes to property investing, you CAN lose money investing in direct property. Irrespective of your prior property investment experience, it is critical to do your research, and understand that any property investment is designed to be held for a long time. When you hold a property for the long term, the chances of making a return can be substantially improved. It is this holding period that makes direct property investing an ideal investment alternative for building wealth inside of super.

Buying property inside of super is one of the biggest advantages an SMSF has over traditional superannuation funds.

Types of direct investment property you can invest in using your SMSF:

Residential Property

Residential property is easier to understand, purchase and manage than most other types of property, as most Australians have already had experience in locating, purchasing and maintaining a residential property as a home owner.

Inside of super you have numerous options when it comes to investing in residential property. In addition to free standing homes you can also invest in units / apartments, and townhouses. From an investment perspective, investing in apartments and townhouses is usually more popular inside of super, as they offer higher rental yields, lower upfront outlays, and involve less time and effort, as the body corporate look after most maintenance.

Commercial Property

Commercial property includes retail shops, factories, and office buildings. You could also include self storage, hotels and motels in this category.

One popular method many SMSFs use to invest into direct commercial property is when a business owner buys or transfers their business commercial property into their SMSF. By doing this, the SMSF receives all the rent paid rather than going into the landlord’s pocket.

Transferring a commercial property, and letting the premises to your own business is one of only a few exemptions where, as a related party, you can receive a benefit from your SMSF prior to retirement. Importantly though, the rent needs to be at market rates.

Transaction costs

If you buy a property and want to sell it a few years later, you may discover that all of your profits are eroded by high transaction costs.

After the cost of the property itself, the next biggest cost to buy a property is the stamp duty. Each state charges stamp duty in a different way, and it is usually tiered so that lower valued property is charged less stamp duty, as a proportion of the value of the property.

Stamp duty, depending on which state the property is located, and the purchase price, can be as high as 6% of the property purchase price. You also have legal fees, loan costs, and special structure requirements to consider when purchasing a property inside of super. When you sell the property, you also have agent commission and other settlement costs to consider.

All of these costs amount to approximately 10% of the property price, and need to be factored in when considering direct property inside of super.

Who pays what and when?

As the beneficial owner of the property, and the borrower of the loan, the SMSF is responsible for paying all of the usual amounts that any investor would expect to pay, if they had bought an investment property and borrowed money in their own name. For example, the SMSF will be required to pay:

  • council rates, water rates, and land tax (if any)
  • interest and other loan repayments
  • the lender’s fees
  • repairs
  • property management costs
  • insurance premiums

Risks

While property prices have over the long term appreciated in value, this is not always the case. Property prices do fall in value, and should be considered a high growth/high risk asset class. It is critical for this reason to employ a team of experts to ensure, firstly that direct property is suitable for your circumstances, and secondly to help you identify the key risks associated.

Like all investments, property profits take time. The returns achieved through property, like any successful investment, are gained through extensive research, hard work, and patience.

If you would like to learn more about Self Managed Super Funds, register now for the next SMSF Education Evening, hosted by Justin Beeton, Founder and Managing Director of The SMSF Club.

Locations include Adelaide, Perth, Melbourne, Brisbane and Sydney.

Disclaimer: while due care is taken, the viewpoints expressed by contributors and/or sponsors do not necessarily reflect the opinions of Your Investment Property.

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