Buying an Investment Property with Self-Managed Super Fund (SMSF)

So you are planning to step into the real estate investment world and your head that you can buy a property with your superannuation? Self-Managed Super Fund (SMSF) is one of the largest sectors in Australia. While people have generally always been buying able to buy SMSF investment properties, what has changed in the past is that you can borrow money to do so.

This means the properties you were not able to purchase in the past are easily affordable. Buying property through SMSF should not be a reason someone chooses to set up an SMSF, but it can be a great option for those who want more control over their super.

So, if you are planning to buy an investment property, it can be advantageous through SMSF because, under superannuation law, owners are typically allowed to use the property for commercial or business purpose. However, you can’t use the property as a holiday home. The penalties are high and not worth the risk.

While buying SMSF investment properties are a great choice, but it requires dedication, time and quite a bit of money. With the increasing popularity of the SMSF, you have options to get house administration support from financial intuitions like SMSF administration, software and education services provider. Such services can help you stay educated about keeping day-to-day paperwork in check and arrange your annual audit and tax returns.

Here are a few things you would SMSFs: –

•     What is the Self-Managed Super Fund (SMSF)?

It is defined as a fund established by one to four people with a sole purpose of providing retirement benefits. The investment decisions are made by the trustees who have the capacity to develop a range of financial strategies for the specific needs of each member. While it offers the same financial benefits like the retail, the key difference here is the ability for members to take personal control of the assets invested.

The members exercise full control over the investment and are responsible for investment decisions.

•     What are the benefits of an SMSF?

As mentioned above, you don’t need to pay the whole amount for the property if buying through SMSF. And you just need to pay maximum 15 percent tax on rent it receives from the property. You get one-third discount on capital gains upon sale of properties that are held for longer than 12 months.  This brings the capital gains tax liability down to the maximum of 10 percent.

•     How much money do you need to get started?

According to recent researches, as a general guide, you need to pay a minimum of $200,000 in existing super saving for an SMSF. The large SMSF investment properties perform better than the small ones as they are more diversified, operate more effectively and have long experience in the field.

The investment amount of $200, 00 ensures that you have enough money to allow some diversification in your investments. It lets you put all your eggs in one basket rather than spreading a portfolio across other types of investment, which can be a risky step for the beginners.

•     How much can you borrow for investment?

While it is always better to use your own savings when planning to enter the real estate investment world, but you can go safe with the SMSF investment properties as banks generally pay 70 to 80 percent of the property value. The experts suggest getting 50 percent loan so the property is positively geared or close to it. For every investor, it is important to have a sound strategy in place to pay the property off over time.

•     Who is it not for?

If you don’t think you have enough lump sum funds for diversification, purchasing SMSF investment properties is not the right choice for you. And buying properties through SMSFs is not a good idea for the people with low-income who are really going to stretch themselves in terms of cash flow.

Conclusion

Buying property through SMSfs can be a powerful way for business owners to build their superannuation to be able to live the way you want to in retirement. However, it’s good to go safe with enough funds and keep your income in mind as you don’t want to get bankrupt with a single wrong decision. Make sure to consult with the experts before you reach final decision of investing in SMSF investment properties. These experts are always available and love to share their knowledge with the new investors so you can gain a lot of knowledge through them.

Originally Published at InvestmentRealEstate.biz