buying an OTP with SMSF?

[rando]

Hi everyone.

I've got some questions about SMSF: is it possible to purchase a property, let it be an existing house/unit or OTP unit, under SMSF, and using SMSF to pay the first deposit 10%? if so, what would happen if it's positive gearing or negative gearing? do I feed in the SMSF accordingly?

Thanks!!

 

[Terry_w]

A SMSF can enter an off the plan contract to acquire a single asset.

SMSF pays the deposit.

if there will be borrowings then you need to set up the custodian trust and trustee first.

If it is negatively geared other income of the fund can offset the loss. If it doesn't have much capital then the trusees should think twice about this and seek financial advice before entering any contracts

 

[Propertunity]

.... and using SMSF to pay the first deposit 10%? if so, what would happen if it's positive gearing or negative gearing?

Bear in mind that SMSFs only pay 15% tax - so neg gearing (including depreciation) is not all that useful from a taxation perspective in a SMSF.

Neg gearing cash losses, needs to come from members funds / contributions.

 

[belvoir]

Also, you cant leverage off equity. You need to sell the asset to access any equity, however this could change in the future.

Not legal but best way to increase value is to purchase a crap shack that needs a reno. Complete the reno using non SMSF funds. Flip the following year for profit. No one checks.

 

[Redwood]

Hi Rando -

It is possible for an SMSF to purchase property with or without a borrowing. You can purchase an existing house or off the plan.

The property will be rented so you would like your rental income and contributions to the fund to exceed your loan repayment. Depending on city you choose try to focus on a good yield of around 5% and have this exceed your loan repayments alone, with the contributions you made building your cash buffer and growing funds for your next purchase.

Investment selection is crucial to achieve sustainable cash flow and wealth creation, so please be careful with off the plan - everyone will paint a rosy picture however I see the reality on a daily basis.

If you are to borrow, please seek advice on the structure required as well as finance considerations. SMSFs are about strategy so sort this out up front so you choose the right property to create wealth in the long term.

For me SMSFs are about having fun, that why there are now 1 million members of SMSFs.

Do your due diligence, decide if an SMSF is right for you and then pull the trigger and fire away.

Hope that helps

Cheers, Ivan

 

[Paul@PFI]

Some of the issues you may encounter with OTP:

- Pre approval wont occur. Approval requires site inspection. SMSF loans are problematic as it is. Most SMSF lenders don't officially "do" OTP and don't then give conditional approval for OTP for that reason. Its a risk to assume you may get the loan later. A breach of SIS investment covenant possibly.
- You must have the SMSF + custodian trust established and ready to go when the deposit is down. The terms of the custodian trust may pose a concern ...When does the trust settle the loan ? Amounts ? etc...Most custodian trusts refer to the sum borrowed, term etc.
- Your OTP may still work but places the fund deposit at risk. What's the investment strategy ?
- OTP settlement conditions are usually for prompt settlement
- Single acquirable asset issue : OTP's are often larger apartment dwellings so the title for the garage may be separate to the unit. Check if its a compliant title !! ie : You cant trade the garage title separately etc....

IMO a related party lend is a far safer form of SMSF loan v's a bank loan. It passes the uncertainties to the members who can deal with where the SMSF cannot.

Even if you happen to find a great deal the only way to access the equity is to sell. Preservation and inability to gear against other property poses limitations.

 

[Paul@PFI]

Hi everyone.

do I feed in the SMSF accordingly?

Thanks!!

Not quite sure what that means but since you mentioned neg gearing I wonder if you refer to cash burn ??

One issue the SMSF needs to carefully manage is cashflows.
- A good buffer in cash
- A property that isn't neg geared is actually better as it can stand alone and not reply on burning contributions every month. Neg cashflow gearing and SMSF don't really mix.
- Access to rollovers funds external to SMSF ie industry fund ?
- Contribution streams.

I have seen people setup a SMSF borrowing then find that their employer refuses contributions to a SMSF. ie NSW Govt employees. Common to some awards. So check it first. There is a strategy around this but it comes with a catch. Some industry funds will limit rollovers to one a year.

Do your homework.

 

[rando]

Thanks guys for the feedbacks!

I guess my situation is, i saw an otp apartment which seems quite good as an investment, but we are hesitant to take deposit off our savings as it is offsetting for our own home. So I was thinking what if we use the money in our super instead? We have about 100k, with sunsuper, not smsf, but am thinking of turning it into smsf if it's going to work out. One accountant told me that I can't borrow money from bank with smsf unless I have a bare debt or something like that? So am quite confused as pretty much we are just hoping to achieve similar results with first deposit from savings vs smsf, with the only difference paying from smsf rather than our own savings. I understand we can't take the money out until later in life but we will take that if it means a more secure option and better cash flow for now?

Sorry for sounding silly as I am really a newbie when it comes to smsf and the more I search and read up on it the more it is not English..

 

[perthguy]

Sorry for sounding silly as I am really a newbie when it comes to smsf and the more I search and read up on it the more it is not English..

You don't sound silly to me. I have looked into this extensively too and there is a lot to get your head around. I found the Learning Modules in eSuperfund quite easy to follow, especially module 7 dealing with property.

http://esuperfund.com.au/learn/learning-modules/pdf-modules.html

Hope this helps!

 

[Terry_w]

One accountant told me that I can't borrow money from bank with smsf unless I have a bare debt or something like that?

A SMSF cannot borrow to acquire an asset unless the asset is held is a separate trust - a bare trust. This is so that if the **** hits the fan the lender doesn't have access to other assets of the SMSF (but they will have access to your personal property due to a personal guarantee).