Buying a home unit in an SMSF

[janglesey]

I would like to purchase an inexpensive home unit in my SMSF. I have found an older 2 bedroom unit in an established Perth suburb that has shown good capital growth over the past 10 years. I expect the suburb's growth over the next 10 years should remain solid. The unit is currently positively geared at around $100 per month.

I would appreciate any comments on what I should be looking out for when purchasing an older unit in an SMSF.

Thanks in advance.

Julie.

 

[Redwood]

I would like to purchase an inexpensive home unit in my SMSF. I have found an older 2 bedroom unit in an established Perth suburb that has shown good capital growth over the past 10 years. I expect the suburb's growth over the next 10 years should remain solid. The unit is currently positively geared at around $100 per month.

I would appreciate any comments on what I should be looking out for when purchasing an older unit in an SMSF.

Thanks in advance.

Julie.

G'day Julie...

In relation to your question, it will depend on whether you are taking out a borrowing to purchase the property or not. I assume you will be purchasing a unit for your SMSF and do not own it currently?

With older units, generally SMSF are for long term investments to benefit your retirement. As a result, I find many of our clients purchase newer houses for the benefit of 'less maintenance', i.e the newer the house, the less you hear about it. So with the right investment you can obtain positive long term capital growth and rental yields that pay off your loan (if any).

If its an older house and you are taking out a borrowing (LRBA), you need to understand the single acquirable asset principle, which means 'one title', you cannot subdivide the asset and break it up into two titles. Believe me this is an important consideration.

Also be aware, that SMSFs have rules and regs so ensure you receive advice from an SMSF specialist and be aware of the requirements for administration of SMSF i.e Annual returns lodged with ATO. Also, be aware of the fantastic tax advantages of SMSF and the fact that you have control over your investments.

Hope that helps

Cheers, Ivan

 

[Paul@PFI]

One issue often overlooked by SMSFs buying property relates to cashflow. You didnt mention borrowing. Lets assume you use cash.

If the sole or predominant asset in the fund is a property and the member/s are in pension phase you need to consider liquidity to pay minimum pensions. Min pensions start at 5% say and increase with age. So in short time unless rental yield is VERY high the fund may have insufficient cash and with one predominant asset may have to sell.

If a borrowing is used this scenario can be even worse. It can literally mean that the income from rent less interest is negative resulting in "recourse" againt other income exaggerating the concern.

Investment diversification in a SMSF will avoid or delay such concerns.

 

[Paul@PFI]

If its an older house and you are taking out a borrowing (LRBA), you need to understand the single acquirable asset principle, which means 'one title', you cannot subdivide the asset and break it up into two titles. Believe me this is an important consideration.

1. Its a home unit not a house
2. You cant subdivide a home unit
3. A home unit can be on two "stapled" seperate titles and still be OK with limited recourse SMSF loans. This isnt always a concern

 

[janglesey]

Thanks Ivan and Paul. Your advice is appreciated.

Fyi - I will be borrowing to purchase the unit.

Great advice about maintenance being less of an issue with a newer property. I suppose the appeal of the older unit is that it is less than half the price of brand new units I've been looking at.

I need to do a bit more homework.

Cheers, Julie.

 

[Mr. Fabulous]

Hi Julie, I would strongly suggest you find an adviser who specialises in SMSF and LRBA borrowings. There are a lot of groups who have sprung up that claim to specialise in this area, but to be honest, they are looking for a quick buck.

Do your research, find a specialist in this area and then decide whether it is best to move forward.

Buying property in an SMSF is not for everyone. In fact, it is beneficial only in certain circumstances. Do not, under any circumstances, go to the closest group that claims they can help you.

I STRONGLY suggest you find a reputable adviser who knows what they are doing, who is able to give you correct advice.

A lot of groups have sprung up lately that claim to know what they are doing, but are only out to take your money. Please be careful. Take your time and do the proper research.

If I was in your position, the first thing I would do is take your SMSF deed to a reputable lawyer for them to look at to determine what the deed allows you to do within the SMSF.

 

[janglesey]

Thanks Mr Fabulous.

You have hit the nail on the head! We were advised to start an SMSF by a group that "finds" off-the-plan investment deals. All deals presented to us have not appealed to me as positive cashflow properties for our SMSF. All, in fact, have been negatively geared which is NOT what I'm looking for.

I will seek some independent advice before proceeding with a property purchase.

Thanks, Julie.

 

[JacM]

Interesting you should say that Julie. It is my understanding that:

• All SMSF mortgages are mortgage insured
• That the majority of the mortgage insurers have introduced a blanket rule saying they won't lend to an SMSF to purchase property that is less than 2 years old. This is in order to combat the very issue that you raised - marketing companies hiking up the price of properties and selling them to SMSFs.

Perhaps one of the brokers can confirm

 

[Qlds007]

Hi Jacqui

No not all lenders mortgage insure their SMSF loans but you are correct there has been some significant changes to Gemworths policy in regards to acceptable security.

Certainly they are not keen on Funds with small balances and have introduced minimum amounts required post purchase as well not wanting to accept security of property less than 2 years old.

Still plenty of choice out there in the SMSF sphere but you are right make sure you find an adviser who has done one or two and knows his onions.

 

[JacM]

Cheers for the clarification, it's relevant info to plenty of folks now with the rising popularity of SMSFs.

 

[janglesey]

Hi Jacqui

On another note, I notice that you are a buyer's agent. That is something I'm thinking of doing as last weekend I found an awesome renovation deal that I wasn't in a position to purchase myself. I put together a proposal for prospective investors and was hoping to be paid a spotter's fee for a successful purchase but the property was bought by someone else.

Somebody raised the issue with me that they thought I should have a real estate licence if I am going to act as a buyer's agent. Is that true?

I have made alot of contacts in my local property market and am confident that I will find alot of profitable deals moving forward so I would like to be able to pass these on to investors whilst making a little bit of commission for myself.

Do you have any advice for me?

Cheers, Julie.

 

[Terry_w]

Hi Jacqui

On another note, I notice that you are a buyer's agent. That is something I'm thinking of doing as last weekend I found an awesome renovation deal that I wasn't in a position to purchase myself. I put together a proposal for prospective investors and was hoping to be paid a spotter's fee for a successful purchase but the property was bought by someone else.

Somebody raised the issue with me that they thought I should have a real estate licence if I am going to act as a buyer's agent. Is that true?

I have made alot of contacts in my local property market and am confident that I will find alot of profitable deals moving forward so I would like to be able to pass these on to investors whilst making a little bit of commission for myself.

Do you have any advice for me?

Cheers, Julie.

You need to be licenced.

 

[janglesey]

Thanks Terry.

 

[Paul@PFI]

Interesting you should say that Julie. It is my understanding that:

• All SMSF mortgages are mortgage insured
• That the majority of the mortgage insurers have introduced a blanket rule saying they won't lend to an SMSF to purchase property that is less than 2 years old. This is in order to combat the very issue that you raised - marketing companies hiking up the price of properties and selling them to SMSFs.

Perhaps one of the brokers can confirm

The major SMSF lenders dont do LMI. As the loan is non-recourse I believe such a policy is contrary to SMSF law. Its extends the recourse beyond the asset. I recall a meeting with a lawyer who advises most of the banks on this product area and she said something similiar. However if you think you save money you will be wrong. Typical fees can pass $6k without trouble as Bank will recoup its legal costs to vet your contract, deeds (2) and all other docs.

Instead of LMI the lender manages risk by requiring a MAX 80% LVR for good resi in cities. Lower for all else. It also seeks to ensure the fund has suffcient actual cash or other assets together with up to a 150% capacity to meet repaymnets from monthly fund income (ie other assets quite often). SMSF also has to hold cash for duty, legals and all fees. Serviceability is a bit more complex than a owner occupied rental for example.

STG is a preferred lender for SMSFs for the quality of their offer and they dont seek personal director guarantees.

I'm not so sure about 2 years though seen lots of new builds...In my experience the majors wont do off plan at all and basic rule is if they cant walk on site to value it - the answer is no.

 

[Paul@PFI]

If I was in your position, the first thing I would do is take your SMSF deed to a reputable lawyer for them to look at to determine what the deed allows you to do within the SMSF.

Good advice !! Except the lawyer / deed thing. Waste of time. The bank will send it to THEIR lawyers (You may be lucky to choose between Gadens and Gadens) who will do it anyway AND still charge you.

 

[Paul@PFI]

You need to be licenced.

Except it seems if you are selling on behalf of a builder, a developer.. And then it can get messy. Heaps of people sell / introduce / facilitate / market / advertise / display property without a license. But NSW Law requires anyone selling RE to hold a license even if its a qualified license (eg buyers agent) Be wary of that. You have no protection. The risk passes to the buyer. The contract may still be valid.

What does it mean in NSW to "sell" real estate ??

Opinions - http://www.safepropertyinvest.com.au/index.php/about ?
Thats just one.

 

[Terry_w]

Except it seems if you are selling on behalf of a builder, a developer.. And then it can get messy. Heaps of people sell / introduce / facilitate / market / advertise / display property without a license. But NSW Law requires anyone selling RE to hold a license even if its a qualified license (eg buyers agent) Be wary of that. You have no protection. The risk passes to the buyer. The contract may still be valid.

What does it mean in NSW to "sell" real estate ??

Opinions - http://www.safepropertyinvest.com.au/index.php/about ?
Thats just one.

Paul, I was talking about this with someone the other day- about whether builders can sell their own properties without a licence.

I had a quick look at the NSW legislation.

It seems to me a person must not act or carry on the business of an agent unless that person holds a real estate licence.
http://www.austlii.edu.au/au/legis/nsw/consol_act/psabaa2002385/s8.html

And a corporation must not act as or carry on the business of an agent:
http://www.austlii.edu.au/au/legis/nsw/consol_act/psabaa2002385/s9.html

I think it is unclear if a builder could sell their own stock. That could be "business of a agent" or perhaps not.

Agent includes "real estate agent" whichi s defined as:

"real estate agent" means a person (whether or not the person carries on any other business) who, for reward (whether monetary or otherwise), carries on business as an auctioneer of land or as an agent:

(a) for a real estate transaction, or

(b) for inducing or attempting to induce or negotiating with a view to inducing any person to enter into, or to make or accept an offer to enter into, a real estate transaction or a contract for a real estate transaction, or

(c) for the introduction, or arranging for the introduction, of a prospective purchaser, lessee or licensee of land to another licensed agent or to the owner, or the agent of the owner, of land, or

(d) collecting rents payable in respect of any lease of land and otherwise providing property management services in respect of the leasing of any land, or

(e) for any other activity in connection with land that is prescribed by the regulations for the purposes of this definition.

but does not include a person who carries on business as an auctioneer or agent in respect of any parcel of rural land unless the regulations otherwise provide.

 

[Aaron_C]

But the non-majors still go up to 80% yet they still use LMI since it is securitised lending. To the OP don't forget that SMSF properties are stuck in the SMSF basically until you sell it since you can't extract equity from the purchase to buy more. Bear that in mind when it comes to property selection.

 

[Jacque]

Hi Jacqui

On another note, I notice that you are a buyer's agent. That is something I'm thinking of doing as last weekend I found an awesome renovation deal that I wasn't in a position to purchase myself. I put together a proposal for prospective investors and was hoping to be paid a spotter's fee for a successful purchase but the property was bought by someone else.

Somebody raised the issue with me that they thought I should have a real estate licence if I am going to act as a buyer's agent. Is that true?

Cheers, Julie.

Hi Julie, Terry is certainly correct. When acting as an agent on behalf of a seller or buyer of a real estate you need to be appropriately licensed. It's a pretty simple check to go to the state Fair Trading departments, for example, and type in the name of the person you're researching. As Jacqui operates in Vic you'd need to visit the VIC Consumer Affairs site to input her details regarding licence details etc. Link here: https://online.justice.vic.gov.au/cav/bla-search-criteria?mode=E

Here in NSW it's https://www.licence.nsw.gov.au/LicenceCheck/

I'm constantly surprised at enquiries we receive from potential clients who don't bother doing this essential first step to ascertain they are indeed dealing with a licensed BA. Also be very aware of BAs who claim to operate across different states as they require to be licensed in each state they are working for you and acting on your behalf- again a basic check and verification before you talk to them is all you need to do here.

Depending on which state you operate in, licensing courses vary and there are several training institutions that offer them however I'd recommend starting with the state's REI for a first port of call here. Best of luck with it all

 

[MikeF]

STG is a preferred lender for SMSFs for the quality of their offer and they dont seek personal director guarantees.

Hi

Only when the rent covers repayment capacity by a country mile and member contributions are not required.