Super offers property investment opportunity
Superannuation doesn’t have an exciting reputation, but a self-managed superannuation fund (SMSF) may provide an alternative pathway to property investment that appeals to savvy investors.
With substantial sums of money sitting in many superannuation accounts, it is important to ensure that retirement goals are achieved through smart investment of super funds and that investors have control of their retirement savings.
The SMSF is particularly attractive for those who are keen to invest directly in residential property.
For example, a couple that has $100,000 each in superannuation could consider purchasing property within an SMSF while both are still working. Two hundred thousand dollars is a significant deposit. Add rental income along with the 9.25% superannuation contribution guarantee and a lender may regard these income streams as sufficient to service a loan.
However, it’s vital that investors are clear about their super fund goals. Under SMSF rules you must have a written investment strategy which outlines how money in the fund will be invested.
One aspect to consider is the amount of diversification within your SMSF’s investment portfolio. If you end up with just one investment property valued at $400,000 sitting in your super fund with no other investments after leveraging your superannuation benefits by $200,000, your exposure to only one single asset may adversely impact on your potential retirement earnings if things don’t go as planned.
There are also other risks associated with having just one large and ‘lumpy’ asset within your SMSF. These include a lack of liquidity to pay out member benefits, and other liabilities such as tax and insurance premiums.
Another important aspect is that you must have enough money in your existing super fund to cover the deposit, purchasing costs and the ongoing costs that go with having an investment property. It is also important to seek professional advice from a Smartline Adviser or other professional before following this path.
There are a good number of lenders now offering interest-only and principal and interest loans to super funds to buy property, under certain strict rules.
However, it also pays to remember that the loan you do select can impact on the investment earnings of your super fund. In the long run, you don’t want to go into retirement with an asset that has debt against it. Your lender may also want to see an exit strategy for the loan if you still have it at retirement age. Therefore, long-term planning with your Smartline Adviser is a crucial element in your retirement plan.
Advice is critical
In addition to working with your accountant, solicitor, financial adviser or tax adviser, it’s important to have the support of your Smartline Adviser to assist with financing your SMSF property investments as lenders’ requirements for these types of loans are complex.
It is your Smartline Adviser who will be able to tell you if you have sufficient funds in your planned SMSF to purchase an investment property, advise whether a lender is likely to lend to your fund and find the right loan product to suit your retirement plan.
Understand the implications
In considering starting up your own super fund, it’s important that you understand the full implications of taking on a loan within your fund.
For example, the fact that the non-recourse nature of SMSF loans, (the lender can’t claim other assets in the super fund should it be unable to meet the debt) means that nearly all lenders require borrowers to provide a personal guarantee for the loan, impacting on the ability to borrow outside of super.
Many people don’t realise that providing a personal guarantee is reducing their borrowing ability by that amount. While you might not have actually incurred that debt, in the eyes of the lender, it has to be allowed for in any assessment of borrowing ability.
It’s therefore important to understand all the associated implications and discuss these with your Smartline Adviser.
Self-employed borrowers looking to use their SMSF to buy property need to make sure they make regular super contributions in order to qualify for a loan. This is because making irregular super contributions, which is quite common for the self-employed, may undermine the ability to secure a loan.
When considering your loan application, the bank wants to see how much money is going into the super fund on a regular basis, which can go towards servicing the debt; the rental income alone is usually not enough to cover the loan repayments.
Lenders ideally want to see regular contributions – usually monthly – being made to the fund over at least two years in the same way that an employer has to make super contributions into an employee’s fund.
However, self-employed people often put lump sums into their fund when they’ve got money to spare or when they are looking to minimise their tax.
So it might be that there is $25,000 in the fund for a couple of years and then all of a sudden the fund holder wants to put $100,000 or $150,000 in and buy a property. That doesn’t work so well for the bank because there’s no regularity of funds going into the super fund which they use as evidence of stability.
A couple of lenders might consider the loan if the borrower can show that they have been putting funds into another type of investment – perhaps shares or an investment property outside of the super fund – but it’s not guaranteed. That’s why regularity of contributions into your super fund is essential if you plan to borrow for a property purchase.
Article supplied by:
Brad Gooda, Commissioner for Declarations
Principal, Smartline Personal Mortgage Advisers
You can contact Brad:
Level 3, North Tower, 527 Gregory Terrace, Bowen Hills Qld 4006
PO Box 2068, Windsor Qld 4030
phone 07 3252 4799 | mobile 0417 062 643
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