Our First Smsf Purchase - A Step By Step Guide

[BV]

There are many sites where people can read about SMSF's but I have not seen anywhere a simple to follow step by step guide so here it is.

First of all I should say that I find SMSF’s fascinating and I believe that it’s a powerful concept we should all be exploring.
To give you an idea of my background, I am not an accountant, a financial advisor or anything like that but I've done a lot of reading, I've gone to multiple SMSF seminars (and to some of them twice) and asked many questions so I have a good idea of what can be done in a SMSF and what structure to use.

We created our SMSF early this year and myself and my wife are the 2 and only trustees. We could have created a company to be the trustee but a SMSF is cheaper to establish and operate with personal trustees.
Having personal trustees limits our options from the lending point of view but we had decided that our lender was going to be ST George because they did not require personal guarantees and they are happy to lend to SMSF’s with personal trustees.

The SMSF setup was done though my accountant who basically bought the deed docs online and got us started.
We then opened up a bank account for the SMSF and rolled over most of our super into our SMSF. We left some money in our old super fund because we had insurance cover and income protection with them and it was cheaper that way.
When we opened up the SMSF's bank account we looked at several banks and the interest rate they offered and 1 of our essential requirements we had was the availability of a cheque book facility. This makes it easy to pay SMSF bills, buy a property at auction etc

We decided to buy an IP which would be cash flow neutral or slightly negative. First we had to decide on how much we could spend.
So we approached StGeorge and asked for a preapproval.
The approval came through for a loan up to $365K
Next we had to decide where to buy.
We looked up the coast, down the coast, east, west and finally decided on western Sydney because that's where we could see value and there wouldn't be shortage of tenants either.

It took us a while to find the right property, we made a few offers but
the type of property we were after was very popular. There was too much competition from first home buyers and/or developers.
We didn't give up and finally managed to buy our first IP in Casula for $323K (a house on a 700+ sq m block).
Why did we buy this particular property?
Because it was affordable, it will rent with only a minor reno, it's in a good spot, it meets our requirement for walking distance to everything and it has potential for redevelopment.

It wasn't a rushed decision but it was an easy decision.
We also looked at our recent super performance (+5% in cash), we took our preferred retirement age into account did the calcs and decided that our super without gearing wasn't going anywhere in a hurry so we bit the bullet and signed the contract.
However, recent super performance was not our only consideration.
We also looked at our finances this year and we saw that we'll be paying a lot of tax because all of our IP's are either cash flow neutral or cash flow +ve so we've decided to do something about it.

We’ve decided to sacrifice into super 25% of our salary.
This will not only save us tax (pay 15% tax instead of 40%) but will also reduce the IP loan considerably.
I anticipate that interest rates will stay low for quite sometime so I can see ourselves doing the same next year.
But even if we did not salary sacrifice, by my calcs and using $91K deposit,
the property will be cash flow neutral from day 1 and our 9% employer contributions will be a bonus
I've also read somewhere that we can also claim depreciation so this could reduce the SMSF tax considerably.

Coming back to the IP purchase, I should point out that our IP was purchased in a bare trust which is basically an arrangement where the security trustee (a company) is holding the property in a separate trust.
This is done to satisfy the tax office that the asset is not at risk.
The property is bought in the name of the company which will be formed at the time of creation of the bare trust.
In our case the bare trust and the company were created 2 days after we bought the property. so we had signed a pre-incorporated contract.
For us this was not a problem because under the corporations act
a company can have a meeting and ratify a pre-incorporated contract but if you live outside NSW check with your solicitor to make sure the same rules apply in your state.

The bare trust is created when you purchase the property and ideally on the same day so it's best to get your accountant to decide which bare trust docs he is going to buy, then get their application form ready and signed and wait for the IP purchase.
Once you find the IP and sign the contract, tell your accountant the property details and ask him to fax the application form in and to do a last minute check on the availability of the company name you are going to use.


When you buy a property remember to get building insurance straight away (accidents do happen. You don't want to be stuck with a burned down property and a contract which you can't get out of)
Also, remember to buy it in the name of the company you are going to create and make sure the name doesn't already exist (get your accountant to check and pick a name which won't be common).
for example, if you had named your super fund
LORRAINE AND STEVE BOLTON SUPERANNUATION FUND you could name your company LSSF PROPERTY HOLDINGS P/L and its VERY UNLIKELY that someone else will pick the same company name on the same day you buy your property.

What name you choose doesn't really matter but be careful not to buy your IP in another company's name. Also, buy your deed docs from a firm which has experience with these issues such as www.cst.com.au
and if you don't understand something ask questions and they'll give you advise.

Anyway, I can't say that the exact same process and strategy will work for everyone but I've used a real life example here so it should give people an idea of how to buy an IP in their SMSF. and if anyone has questions I'd be happy to answer them.

Best of Luck

[BV]

Another thing,

If you are going to setup a SMSF make sure you get the structure right.

For example, you'll need to decide if you will have a corporate trustee or a personal trustee.
The Corporate Trustee option is the more expensive one but it's easier to do changes to it down the track.

For example, if you decide to go with the personal trustee structure and later on 1 of the trustees passes away you'll have to rewrite the SMSF docs and depending on your circumstances it could be difficult to unwind the SMSF without significant costs.

Companies which sell deed docs promote the corporate trustee option but both options are there so do your own research get your accountant to look at both options and then decide.

[Ausprop]

great post - I plan to read thru it in more detail later.

[Risky Business]

Super effort Bill. Thanks for sharing with us. Just wondering why you decided to roll over your super while share values are low?

Did you consider waiting for a recovery to the balance? Or did you feel that the timing was right at the moment?

Sounds like an effective structure mate. What sort of interest rate did St George offer you?

[BV]

Originally Posted by Risky Business

Just wondering why you decided to roll over your super while share values are low?
Did you consider waiting for a recovery to the balance? Or did you feel that the timing was right at the moment?

Our super had been in cash since Nov 2007 so it's not like we had lost anything.
We did not switch back to the balanced fund because we had no faith in the super fund doing the right thing by us.
Our thinking was that they could be investing our money and getting 10% returns and then fudge the figures and share the profit around to minimise losses in other areas.

Originally Posted by Risky Business

did you feel that the timing was right at the moment?

Timing played a part in it but it was not the determining factor.
We did it because it was important to have control of our money,
to max our returns by gearing within super
and to make better use of our tax $.
I do realise that many shares represent excellent value and for this reason we'll continue to buy small parcels of shares but for now we've decided to leave our shares outside super.

Originally Posted by Risky Business

What sort of interest rate did St George offer you?

STGeorge only offered us 4.5% interest and it's only a 3 month special.
We opened up a STGeorge account for convenience.
At this stage we don't intend to leave much money in there so returns are not high up on our priority list but if our strategy changes we could open up a separate bank account with rabobank.

[perky29]

Hi,
I see you mention that with St George your loan was pre-approved. Once you found the house, how long did it take for formal finance approval? Our SMSF loan with Nab took almost 6 weeks to get formal finance last year - looking back I think we were lucky the seller did not pull out of the deal but at the time not many houses were selling....
Also, what are the lvr's with or without personal guarantee? Somewhere
around 70%?
David

[BV]

Originally Posted by perky29

Hi,
I see you mention that with St George your loan was pre-approved. Once you found the house, how long did it take for formal finance approval? Our SMSF loan with Nab took almost 6 weeks to get formal finance last year - looking back I think we were lucky the seller did not pull out of the deal but at the time not many houses were selling....
Also, what are the lvr's with or without personal guarantee? Somewhere
around 70%?
David

Dave

We've only just bought the property so the loan is not finalised yet but the STGeorge approval I am told will be very quick (a couple of weeks allowing for the mailed docs to go back and forth etc)

For Residential IP's and in Sydney the highest LVR I know of is 72% with StGeorge. NAB from memory is in the 60's and want personal guarantees so I stayed well away from them.

[Rockstar]

Hi Bill,

Great Info. Excuse my ignorance here as I have hardly ever paid any super (but my wife has a bit) and thus not held much interest in the mechanics of these funds. Hence I don't know if they would benefit our situation or not.

How much was the IP purchase price and where will the funds for settlement come from? Does the deposit (28%) come from the super fund and/or can you inject your own cash as well?

Thanks, RS

[BV]

RS

The IP purchase was $323K
Approx 30% will come from super and the rest from StGeorge
I'll use $90K as a deposit and approx $20K for purchasing costs, stamp duty etc, all this will come from our super fund.

We are not using own money but have started contributing to our super fund
for tax management/minimisation reasons.

If you don't have much super then it's probably not worth looking at this option.
Having said that, you can boost your super balance by contributing to it either by salary sacrifice or with own funds.

cheers

[moyjos]

Originally Posted by BV

RS


If you don't have much super then it's probably not worth looking at this option.

How much is "enough" to start??

[Rockstar]

Originally Posted by BV

RS
If you don't have much super then it's probably not worth looking at this option.

Thanks Bill,

With our small balance, maybe we could get a 1BR flat in Woop Woop as a start.

All the best, RS

[perky29]

Thanks BV, 72% lvr with no guarantee is very good - I think we might bpass NAB next time. Especially after their slow process , lack of effective communication and lack of being able to fix for 5 years when we tried 2 months ago (when it was 6.19%) -simply because the loan was an interest only loan (variable can fix - how silly is that??)!!

[BV]

Originally Posted by moyjos

How much is "enough" to start??

It depends on what you buy.
For example, if you found a house in country NSW for $50K and you had $50K in your super you could buy it outright and you won't need complicated SMSF structures.

But why would you do that?
If you are not gearing and assuming that property goes up by an average of 7% you will probably get better returns by leaving your money in your existing super fund.

I would only create a SMSF to gear my existing super and multiply its returns.
For this reason you need to have a deposit and the bigger your deposit the more money you can borrow.

I probably wouldn't start a SMSF with less than $100K
To buy property you'll need a minimum of 28% deposit plus stamp duty plus a couple of $K for setup costs. On top of that you'll have the costs of the yearly tax return + audit (around $1K but these can be paid from your employer contributions)

[House_Keeper]

Thanks for sharing, a very interesting thread. A few questions.

How much did it cost to set up the SMSF?

Can you use the same SMSF to buy a second property? What would you have to do again?

You mentioned an interest of 4.5% for three months. What does the interest rate becomes at the end of the honeymoon period?

[BV]

House keeper

It costed me $350 to setup the SMSF
and 1000 for the bare trust and the company which will hold the property.

You can use the same SMSF to buy a 2nd property
but you'll need a separate bare trust each time you buy a property
because each trust is written specifically for the property you are buying and the particular lender you are going with.

The 4.5% interest rate I was referring to was not the lending rate.
It was the SMSF savings account rate (for any super money left in the account) and it will go down to 2.3% after 3 months (not a great savings rate that's for sure)

I believe Rabobank pay 4% and ING 3.5%
so I could open one of those accounts for my contributions to go in
or I can leave things as they are, i.e let my contributions go into the STGeorge account and then use them to pay off the SMSF mortgage (and save 5.75% in interest).