Property investing through your self-managed superannuation fund (SMSF) can be a great way to create wealth for your retirement. By investing in property, you can diversify your super investments. Any income from the investment property, including capital gains, will be taxed at concessional rates, so you should end up saving money in the long run.
How does it work?
The rules and regulations for setting up and borrowing through a SMSF are complex. So it’s important that you obtain specialist financial planning, accounting and legal advice to make sure this investment strategy is right for you.
Review your SMSF trust documentation
If you already have a SMSF, you’ll need to make sure you have the necessary powers to borrow under your fund. Again, it’s important you seek appropriate advice.
Set up a separate security trust
The first step to purchasing an investment property through your SMSF is setting up a separate security trust on behalf of your SMSF. This new security trust will buy and hold the property, and provide a guarantee for your loan.
Loans to SMSFs are “limited recourse loans”. This means that if you default the bank can only access:
- the investment property;
- any other property securing the loan.
The bank won’t be able to access your other super assets.
Funding your investment
Like regular property investment, you’ll need a deposit from your self-managed super fund, and a loan to cover the difference. You’ll need to take into consideration how much the bank will lend you, and how much your SMSF will need to provide. When you compare the loans offered by different banks, check interest rates carefully. Some lenders charge their regular home loan rates, while others use higher business loan rates.
The security trust buys and holds the property
The security trust buys and holds the property on trust for your SMSF. Rent payments flow through to your SMSF and help pay off the loan. If this rent doesn’t completely cover your loan repayments, the extra needs to come from your SMSF. You’ll need to consider your cash flow when thinking about this investment type. Again, professional advice is important.
After the loan is paid off
Once your loan is fully repaid, the property can be transferred from the security trust to your SMSF.
For further information, please contact Revolution Financial Advisers.