Quantum Property Warrants - SMSF and leverage

JIT

JIT

I'm aware of the use of Self Managed Superannuation Funds (SMSF) and joint ventures with unit trusts as a way of using borrowings to invest in property, as is explained by Chris Batten on his website, www.chrisbatten.com.au.

I'm also aware of using SMSF (or other structures) to invest in property via private and property syndicates.

Now, I'v recently come across a product that is different to the above two investment strategies, called "Quantum Property Warrants": see the website www.quantumwarrants.com.au.

The product is backed by a ATO product/tax ruling, though it expires in June 2008, I'm not sure of the significance of this?

It seems in some ways almost too good to be true, offering a unique way of leveraging using a SMSF and ENORMOUS TAX BENEFITS, for example, from my limited understanding of it so far: the following could be tax deductible - deposit, stamp duty, loan costs, principle and interest repayments, all property expenses, depreciation - as well as this, there would minimal stamp duty and capital gains tax on sale, and it uses limited recourse financing,

I'm in the process of getting a product disclosure statement (PDS) to assess this further and in the meantime sending an e-mail to them to ask some questions. I am aware that the "John Hopkins Group" in Melbourne, www.johnhopkins.com.au, is now marketing the product in Melbourne for the first time.

From the information on the website I can see there are pros and cons to using this product, but haven't quite got my head around it yet.

If any of the experts on the forum here could have a look at the site and see what they think, it would be very helpful. Particularly the potential risks, downsides, suitablity to certain investors, "catch 22's". Especially those familiar with SMSF, tax, and structuring...


GSJ
 
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I personally haven't heard of this before, but the concept sounds interesting.

I had long been aware that an SMSF can invest in warrants in order to get leverage in the stock market.

The sort of properties though are not my ideal sort of properties. The sound like boutique apartments, with little land content and no opportunity to value add; the capital growth may perhaps be limited in the shorter term.
 
Thanks Geoff,

Not my kind of properties either, BUT, they seem to have an option where you pick a property and run it by them and pay a "due diligence fee" of $1000.

GSJ
 
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Not for me

Yes I have, it IS too good to be true! The marketing is somewhat misleading. The stamp duty, deposit and principle repayments are certainly NOT tax deductible. The properties able to be purchased are very much restricted to brand new off the plan type apartments.

If anything, it is only suited to very high net worth individuals with I feel at least 400K in their SMSF. Not only that, your SMSF needs to be making a very high income as it is, to take advantage of the tax deductions of purchasing this sort of property, in this structure.

The fundamental flaw I feel is that it is essentially promoting purchasing an investment with plenty of tax deductions (interest on loan, rental expenses etc...) within what is really a low tax environment/structure anyway, ie, superannuation!

It is a bit like telling someone who has a low taxable income to purchase a highly negatively geared investment property, where, clearly negative gearing is better suited to people on high incomes/marginal tax rates!

The people marketing the products themselves don't fully seem to understand the product either. Even worse, when asked for a product disclosure statement they refuse to send you one, saying you need to come in and formally sit with them face to face first!

GSJ
 
Thanks GSJ.
Did you already have your SMSF and only investigated the product in particular , or do you mean SMSF is also not on for you ?

I am interested as am contemplating to have a SMSF set up for us. (we are a " government employee" family and have the compulsory Qsuper fund)

I am reading a book by Barbara Smith on leveraging within SMSF, she mentions a few ways, warrant instalment is one, as GeoffW has said.

ta
 
Don't like the product!

No, I meant that I don't like the product. I think a SMSF can form an excellent part of your financial plan and has many benefits. Obviously you need to have a certain amount of money in it before it becomes worthwhile, from 50 to 200K depending on who you ask and how you invest.

GSJ
 
BUMP!

Seems not many people were interested in this last year...or maybe you guys weren't ready for it!

Anyone else checked this product out yet?

Seems like they are structured effectively the same as instalment warrants in the sharemarket.
 
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I still haven't seen the PDS of this product though...last time I asked they wouldn't e-mail it to me without a face to face meeting.
 
You must also sign a confidentiality agreement as well. I sat through a preso but never took up their offer any further as I didn't want to sign the CA. Now that the legislation in relation to using instalments in SMSF has been passed, you'll see a lot more of these kind of instalment structures in the market place that has traditionally been over shares on the ASX.
 
My first awareness was reading the whole thread just now, and to be honest Jit, it sounds like just another developer's marketing storefront, that has found a new angle to flog their stock (no doubt over-priced) to the unsuspecting.
Fortunately you are of a higher knwledge than the average Joe, and thanks for bringing it to everyone's attention.
It's always a bad sign when they won't send you info and they want to see you face to face.
 
Thanks for the replies.

I thought this was a pretty unique product back in Jan '06...really surprised at the general lack of interest here??

Maybe because I've already given it the thumbs down?! :D

Will be interesting to see what other similar products are launched in the near future...

Note: The initial marketing for the QW product was a bit misleading from memory, but seems like it's been changed now.
 
Hi Marc,

I think that Quantum just sold their own property products so you're right it must have been packaged with substantial fees. However, with the new law the legislation is specific to property so you will be able to choose your own property in line with your SMSF investment strategy. I would prefer my super working at gearing levels rather than at contributions plus growth so lets hope we can gear into our choice at reasonable cost when the fine print and the inevitable products are out in the market
 
I wonder if borrowing costs will be higher with this sort of leverage in SMSF?

Also, leverage seems like it may be capped to 80% LVR?
 
The borrowing costs will be higher due to the fact that the loan is non-recourse, meaning other SMSF assets within the fund will not be at risk. The asset protection afforded non-recourse financing will be tempting for those who can transfer commercial property and want to avail themslves of the asset protection, potentially no Capital Gains Tax and the 15% income tax rate of Super. I know in Victoria there is an added bonus of a potential stamp duty waiver so there will certainly be opportunities that open up.
 
Thanks Pat,

As I mentioned in another thread I think that this sort leverage in SMSF would be better suited to a positively geared investment, and leveraged commercial property would seem ideal to me.
 
they do not sell property

They are regulated and have to aprove the property that will be warranted. It is in the name of the fund. You can certainly purchase established property through the warrant.
 
NigelKibel said:
One of the most exciting developments in property investment are property warrants. This will enable invesors to borrow money through a self managed superfund to buy an investment property.

Typically you need a 30% deposit and you are are looking at higher establishment fees than a normal loan. For example if the property was $400,000 then the set up fee would be 1.5% or around $6,000. This product has been around for much of this year however the establishment fees were around $20,000. The interest rate is around 8.6% and there are ongoing fees of around $4000 per year. There are also a number of smaller charges.

The upside is that you can salary sacrifice all the payments making these 100% tax deducatable. The next great thing is that if you buy a property through a superfund and keep it until you are 60 and then sell the property capital gains tax does not apply. When you weigh up all the benefits this is a great way to buy property.

If you need or want to sell the property earlier as long as you have kept the property for more than 12 months then you will only pay 15% tax and a maximium of 10% capital gain. I have great financial planner who understands the product much better than me.(emphasis added my me)
Click to expand...

Just quoted this out of the 'Caveat Emptor' section, so it can be discussed more...

I started this thread in January 2006, so it's old news here on Somersoft, but thanks anyway Nigel. :D

Seems like A LOT of fees/costs/charges!

And tax deductions don't necessarily make it a good investment.

Note also that Quantum have very specific criteria for 'established property'.

When I weigh up all the benefits, at this point in time, I am not yet convinced that these sort of structured products are such a great idea, particularly for residential property that is likely to be negatively geared (more so with all those fees/costs/charges, and with less tax benefit in a low-tax SMSF environment!!!).

Maybe though if you are doing property developments within your SMSF then you will benefit if you sell properties for profit due to the lower CGT.

Any further thoughts?

If others here have a better understanding of the product (or have seen a PDS!) please come forward!

Any financial advisors here supporting this product and dare (I mean care) to comment? :D
 
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Unfortunately this law is again for the wealthy, call me cynical but I think John and Peter want to pump prime their own exhorbitant super so they have just snuck this one in before they're on the political scrapheap on November the 19th.

The reason is because to self fund an average property of $500,000 with the minimum deposit of 20% you will need SGC contributions on a salary of about $150,000 from an employer plus the net rent from the leasing of the property.

To all the inner city MBA's and other professionals, here is a free kick, the rest can please themselves.

At least competition should drive down the cost that Quantum quote for these warrants
 
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