Pros and cons of buying property in super
TOO many people set up a SMSF to buy a property, who shouldn’t really be doing so.
At the same time, there are many it really suits who just haven’t got their head around it yet…that buying in SMSF ticks both the tax minimisation and Asset Protection boxes.
When your capacity to service loans is assessed, for lending outside Super, the bank takes into account at all your commitments and will NOT account for the income you’re forced to put in Super (your ‘SG’ or Superannuation Guarantee).
However, when it comes to SMSF’s the banks can consider only your regular contributions into Super and the rental income the acquired asset will generate.
I helped a dentist buy her surgery building last week and it actually wouldn’t have worked outside super, given her numerous other loans.
Anyway, she’s much better off using the mighty SMSF tax haven great loan too, 4.58% fixed for 3 years with no Establishment Fee. The variance amongst the banks’ rates in this space is crazy.
Us financial advisors can’t give anything other than general advice. Plus I have chosen to specialise only in lending, so I’d get sued harder LOL.
But what I can tell you is why only months ago, I actually purchased our new office building in my SMSF! if you’re interested
The purchase price was $1.52m.
I snapped it up two weeks prior to the auction, just loved it, it used to be the CBA building on the Hume Highway in Strathfield when I was a kid, and more recently a Curves gym.
The cheapest rate was offered by a bank who’d only lend 65% though.
But I didn’t have enough in Super for the rest.
That’s why I had extended the settlement period to July 7, enough time for Tina and myself to each concessionally contribute $35k in each before June 30, and then again on July 2.
The rest came from an investment offset of mine, and was non-concessionally contributed (we got no tax break for that bit).
By the way, at the moment (watch this space though), Bankwest allow you to unlock the equity against your home at the same owner-occupied rate (the increase must be restricted to a dollar amount representing 50% of your home’s value). The other banks charge the higher investment rate for the cash out bit. It’s daylight second if you want to avoid cross-collateralising and want part of your future investment loan at owner-occupied rates.
The interior fit out is underway, being paid by the tenant (my business). The rent iChoice pays my SMSF is of course a tax deduction. However, my SMSF only pays 15% tax on it, rather than something like 45% if we had bought in our personal names. How much that effectively save us is quite a big number. Rent of $90,000 x (45% – 15%) = $27,000 annual saving.
We need to understand that Super’s simply a different tax environment, proudly offered by our Government to encourage us to not rely on the pension. The above shows how powerful it can be. Once I hang my boots up (the loan will be repaid in 15 years) the tax rate in Super changes to 0%. And Capital Gains Tax is better too. But let’s look at the negatives of my decision to buy it in Super:
The equity I build up in the property will be unusable (I can’t leverage against this property) as loans in Super can only be taken to acquire
The building actually has the scope for another level to be built on top, but this is not allowed when the property is geared (to build it I’d need to not only get the $900K in to pay off the loan, but also the cost to build!)
The paperwork! If you have an SMSF you’d know all about it! But I don’t mind being a little inconvenienced if it gives me an extra half a mill, I’ll always switch & move my lending around to get ahead, we all should.
If you’re thinking of setting up an SMSF maybe do it in July (don’t do it in June and pay for a tax return for nothing) and also get the Custodian Trust set up to, as it needs to be established before you exchange. An accountant or Financial Advisor can assist you, please get a good one, not the nearest one. In life you need an accountant, solicitor, financial advisor and credit advisor / mortgage broker who are at the top of their game. Lucky the later comes at no cost!
By the way, name your corporate trustee of your SMSF something cool.
I called mine Khoury Boys Pty Ltd, and also set up khouryboys.com.au in case my little fellas ever open a pizza shop one day.