It seems no matter how much data is available on the internet or elsewhere, the question of investing in property with your SMSF continues to be an area that prompts the most questions and causes the largest amount of confusion for the consumer.
SMSF 101 – A self-managed super fund is a fund that has a maximum of four members (most are set up between
partners and have two members). It is a fund that must meet the requirements of the Superannuation Industry (Supervision) Act 1993 (SISA).
The SMSF landscape has changed dramatically over the last two years. You have probably noticed the staggering increase in superannuation adverts on television, even just recently. The internet has not escaped either. Just look at the cost of the Google search words “SMSF Property”: two years ago, it was bidding at 80c per click and today it trades at around $20.
Represented in the graph below, this increase in interest is the reason why the industry has responded to provide straightforward, simple solutions to the set up and management of an SMSF. It shows the Google search frequency since 2004 of the search term “SMSF”. Banks like AMP have committed to the space and some more established operators such as esuperfund have been mastering their offerings for quite a while. This competition has changed the cost and difficulty of setting up and managing a fund dramatically.
Some issues to consider when thinking of starting an SMSF:
- Pay particular attention to anyone “recommending” one to you. One reason the space is filling with providers is the immense pool of savings that Australian superannuation members are holding – over $1.5trn. Be aware and ask how any provider makes money, demand transparency and ensure all commissions are disclosed
- Be extremely careful of property sellers/spruikers suggesting a set up and a purchase of a property. Usually there is a price to pay for this approach in the form of overpriced property itself.
- Remember that the primary purpose of your super fund is to provide for its members in retirement, and accessing that money before this time carries heavy penalties. So don’t sign that contract to buy your dream holiday home, pay for your kids’ uni or to fund your business before you meet the criteria specified.
- Do not embark on an SMSF journey unless you understand that you are doing it because you believe taking active control of your super will benefit you in retirement.
- You have to assess the fees you pay for administration, which can range from $900 per
annum for an online provider with strict rules on what you can and can’t do, to $4,000 odd for an experienced accountant who will be continuing to provide service and advice on all aspects of your fund.
Some issues to consider when seeking SMSF mortgage finance:
Does the fund have enough funds to complete the purchase settlement?
Most SMSF lenders require between 20-30 percent contribution form the fund in order to settle on the property purchase. Remember the fund must have sufficient reserves to meet the purchase cost obligations such as stamp duty and loan fees and charges as well as enough free to meet any diversification requirements that the fund may have after the purchase has been settled.
How will the fund pay for the loan?
In most cases the fund will rely on the contributions from the members and the rental return from the property being purchased to meet the obligated repayments on the loan. However, all lenders will require a buffer when ascertaining the funds borrowing capacity just like a regular loan. Just ensuring that your contributions and rent are more than the required monthly repayments, does not mean the fund qualifies for a loan.
Consider the type of property you intend to purchase within the fund.
Like all mortgages, security location and security type is important, always check with your mortgage adviser if you are considering purchasing any kind of residential or commercial property to ensure that it is acceptable to the lender providing the credit.
Redrock are specialists in SMSF finance and advice and have been arranging SMSF loans since 2008. Talk to us today about you can fund an investment property purchase using your Self -Managed Super fund.
To discuss this article or anything to do with your finances, please call our office today and we will be happy to assist you.
