Top 3 Tips for Buying Property with Your Super

Since employer contributions to employee superannuation funds were made compulsory in 1986, self-managed superannuation funds (“SMSFs”) have become very popular. Increasingly, Australians have discovered that using SMSFs to fund the purchase of an property investment is an excellent investment strategy. To avoid common pitfalls, here are the top three issues to stay aware of when funding property through SMSFs.

  1. Choose the Right Type of Property
  2. You can use SMSF loans to fund purchases for any type of property, including commercial properties, residential dwellings, or holiday units. However, the property that you purchase must be “a single acquirable asset.” This means if you are borrowing after 7 July 2010 you cannot, for example, buy a block of land and have a dwelling built, buy an existing property to have it developed, or subdivide the property. In the case of an off-the-plan property, the borrowing arrangement entered into by the SMSF must be for a completed property and not just a contractual right to the property.

    Keep in mind that any residential property must be purchased from an arm’s length vendor while commercial properties can be purchased from related entities so long as the property is let for business use.

    For those wanting to develop property using superannuation monies with gearing, you can either develop the property under a different name or entity, then have the SMSF purchase it after it is complete. This option will incur additional costs but some states do allow for stamp duty exemptions or reductions when the property is transferred. This strategy is only open to commercial properties since residential properties must be purchased from arm’s vendors.

    Alternatively, a private unit trust can be established to undertake development and the SMSF to invest through the purchase of units, though the SMSF and its related parties cannot own more than 50% of the total units. This option to open to those intending to undertake residential property development.

  3. Borrow at or Below the Optimal Amount
  4. “How much can I borrow” is a very common question when it comes to purchasing investment property through SMSFs. The answer will vary depending on the lender but you can usually borrow up to 80% for residential property and 65% to 70% for commercial property. Rural or farm properties may attract significantly lower loan to value ratios at usually around 50%.

    What is the optimal amount? There is no hard an fast rule, but on a general level, 67% or 2/3rds is optimal since going any higher will usually mean that your property will be cash flow negative.

  5. Allow Plenty of Time
  6. It will take longer to purchase property with your SMSF than in your own name, as there is an additional step for both you and your lender. Allow plenty of time to avoid unnecessary delays or costly errors. Firstly, you need to obtain an Australian Business Number (“ABN”). The ABN is required by law with respect to transfers for super. This step will take up to 28 days. Allow another 28 days for the SMSF to receive rollover of monies from existing retail/industry super fund(s).

    The time frame from your contract date to finance approval can take around 3 weeks. You should allow 6 to 8 weeks for contract date to settlement. If you already know you want to use your super to invest in the future but haven’t yet picked out a property, you can get started on setting up your SMSF. Get the required paperwork ready where possible, remembering that you need two years of lodged income tax returns, superannuation statements and/or SMSF accounts.

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