OnePath’s Graeme Colley sets out the five most important things that investors should bear in mind before investing in property via an SMSF
1. Look before you leap. Do your research, and make sure that investing via super is the most appropriate option for you. You may be better off with a different type of vehicle. Look at the alternatives.
2. Make sure that the property is a good investment proposition. Make sure that it’s one that you would be happy to buy in your own name. Don’t assume that having a property in super will automatically improve your capital gains due to the tax breaks. Compare the numbers: if the long-term capital gains don’t add up, it may not be worth using super. Make sure you do your due diligence – do absolutely everything you would for buying a property in your own name. Just because it’s being bought in super doesn’t mean you should skimp on any aspect of your investment
3. Make sure you understand the limitations of superannuation law, particularly limits on redeveloping and subdividing. As a rough guide, ‘repairing’ – restoring property to a working state – is allowed, while ‘improvement – making capital improvements such as extensions – is not. The latter could result in you having to renegotiate the whole thing, which is a costly exercise.
4. Make sure you understand the cost of borrowing within super. Limited recourse borrowing used to be quite expensive even in terms of drawing up the documents: that’s come down now, but there’s still a significant cost attached. Similarly, there is still an interest rate premium for taking out an SMSF loan. Make sure the numbers add up.
5. Work out whether you’ll be able to support the borrowings within your super fund, either through your statutory contributions and/or supplementary contributions. Make sure you incorporate a buffer for interest rates, too.
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