Article supplied by The SMSF Club
Buying a property and using the wealth created to fund your retirement is not a new philosophy.
Prior to compulsory superannuation, previous generations funded their retirement by using the equity and wealth they had created through property, primarily their home. Many of our grandparents and parents purchased their home, worked hard to pay off their mortgage, then after many years (often decades), eventually retired. To fund their eventual retirement they simply sold their home and downsized using the equity they created over their lifetimes.
So why has it been so difficult in the past to invest in direct property using your super?
In the past, buying direct residential property inside of super was out of reach for most Australians, due mainly to the costs associated, and the high entry level to buy an average Australian property. To buy just one investment property in most states in Australia you are going to be up for costs of over $300,000. Therefore, in the past you would have needed at least $300,000 inside of your super fund to buy just one property, let alone all of the associated costs, such as stamp duty.
The rules have now been changed
In 2007, the superannuation rules were changed to allow you to borrow money inside of an SMSF to purchase both residential and commercial property.
Now that you can borrow money through a Self Managed Super Fund to buy both residential and commercial investment properties, it puts SMSFs in a league of their own. By giving you the potential to accelerate returns and boost the money you have to invest inside of super, an SMSF has a huge competitive advantage over other superannuation funds. Borrowing money to invest to buy direct residential or commercial property is something that no industry super fund, retail fund, or employer fund has the ability to do.
Banks are willing to lend up to 80% of the value of a residential property. For commercial property, the banks are willing to lend up to 70%.
So, if you are looking to buy a $400,000 residential investment property using your SMSF, the bank will lend your SMSF up to $320,000 to help fund the purchase. All that you require in your SMSF is the $80,000 difference, plus the funds required to cover any transaction costs and on-going fees.
For a commercial property valued at $200,000, the bank will lend your SMSF up to $140,000 to help fund the purchase, meaning you would only need $60,000 in your SMSF to fund the purchase, plus the associated transaction costs/on-going costs.
SMSF Borrowing Rules
Most banks will have special arrangements in place for SMSF trustees wanting to borrow to purchase an investment property. The process to gain approval for an SMSF investment property loan is very different to obtaining a property loan in your own name, as any borrowing arrangements inside of super will need to comply with the SIS Act (Superannuation Industry Supervision Act, 1993).
The main lending conditions that need to be met to ensure you comply with the superannuation borrowing rules are:
The borrowed funds can only be used to acquire assets usually allowed to be held in super. That is, the property must meet the sole purpose test, being for the sole purpose of providing an income in retirement.
The asset acquired is held on trust so that the SMSF receives a beneficial interest in the asset.
The SMSF has the right to acquire the legal ownership of the asset.
Any recourse that the lender has under the loan agreement is limited to the asset the loan relates to only.
If you’d like to learn more about whether a Self Managed Super Fund is right for you, book an appointment with a Head Coach.
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.
Do you have more than $120k in your super fund? You could use your super to buy property - Find out how