Buying cheap property using smsf

[virgo]

Hiya

Early days yet but i am thinking of buying a cheap property using smsf.

A few questions; if i put my super into an smsf and buy a cheap IP with very little loan (i believe you can loan up to 80%),

a) can i continue to use the monthly super to pay down the rest of the loan

b) will the rents thus received from the IP go into my pockets or will it have to go to the smsf...

c) will step b) then help to improve servicibility thus enabling me to leapfrog to another IP?

As i say it is early days yet but i am exploring the possibilities; would love to hear from someone out there who has done it....

 

[Rolf Latham]

Hi Virgo

The SMSF is a trust based structure so the incomes etc must go inot the structure.

Try and borrow what you can LVR wise "within reason" using a product that allows redraw or offset.

Note that SMSF property locns can be limited due to lenders wanting to limit their risk.


ta
rolf

 

[virgo]

SMSF Cheap Property

Hi Rolf

Thanks for replying; still trying to get my head around your answer; perhaps i can illustrate using an example?

say for argument's sake i have 100K in my SMSF (from my super balance)

To keep LVR reasonable, i buy 2 properties at 150 each.

Each property say rents for 200 per week.

My loan for each property is 100k.

Interest is 7%.

Excess of annual rent over interest =200*52*2 prop. -200K*7%
=6800 (ignore all other mgt fees)

Are you saying the 6800 has to go back to my smsf? Will this improve my overall servicibility for the next property?


Also your point of redraw/offset; are you saying to borrow up to 80% (which is now apparently available) and then park the remainder in an offset/redraw?

thanks

 

[Propertunity]

Hi Jen,

It is not all about YOUR serviceability. The loan & the IP & the rental income all belong to the SMSF. The Super contributions you make to the fund can be used to make up for any shortfall in the loan repayments that the SMSF has to make.

 

[Property Hoarde]

Yes the money has to go back into the SMSF.

You will not be able to access any money from your SMSF until at least 55(or later depending on your age).

If you even think you could take money out of an SMSF can I sugguest you do not do it. SMSF like all Super funds has a lot of requirements which you will find in the SIS Act.

As an SMSF auditor i would breach you in a heart beat if you do that.

 

[virgo]

Take money out of SMSF

Yes the money has to go back into the SMSF.

You will not be able to access any money from your SMSF until at least 55(or later depending on your age).

If you even think you could take money out of an SMSF can I sugguest you do not do it. SMSF like all Super funds has a lot of requirements which you will find in the SIS Act.

As an SMSF auditor i would breach you in a heart beat if you do that.

And that is why i am asking so many questions first !

 

[bene313]

Virgo go and have a read of this thread:

http://www.somersoft.com/forums/showthread.php?t=54235

 

[Wunderbar]

Yeah just remember the SMSF isn't your money....yet

 

[MikeF]

Interest is 7%.

Variable interest rates start at closer to 8% pa.

 

[deejay]

Others have covered the general idea. Yes, you can buy a property in an SMSF with a loan, but the rental payments have to go into your super.

There is one legal way that you can use an SMSF to improve your personal cashflow. If you have life insurance or income protection insurance that you currently pay for yourself, you can move them into the fund and pay future premiums out of the fund. There are a couple of pitfalls with this, so talk to an expert before you do it.

One warning - don't take out a loan that the SMSF can't cover just from rental income (ie, make sure the property is cashflow positive). Otherwise, you're limiting your personal choices, for instance, to take time off work to travel (because the SMSF is counting on your employer's super contributions to service the loan).

 

[virgo]

SMSF Cheap Property

Virgo go and have a read of this thread:

http://www.somersoft.com/forums/showthread.php?t=54235

Thanks Bene313

What an excellent post!

 

[Wunderbar]

Others have covered the general idea. Yes, you can buy a property in an SMSF with a loan, but the rental payments have to go into your super.

There is one legal way that you can use an SMSF to improve your personal cashflow. If you have life insurance or income protection insurance that you currently pay for yourself, you can move them into the fund and pay future premiums out of the fund. There are a couple of pitfalls with this, so talk to an expert before you do it.

One warning - don't take out a loan that the SMSF can't cover just from rental income (ie, make sure the property is cashflow positive). Otherwise, you're limiting your personal choices, for instance, to take time off work to travel (because the SMSF is counting on your employer's super contributions to service the loan).

Yeah the pitfall would be that it impacts the SMSF's serviceability for the loan

 

[bene313]

One warning - don't take out a loan that the SMSF can't cover just from rental income (ie, make sure the property is cashflow positive). Otherwise, you're limiting your personal choices, for instance, to take time off work to travel (because the SMSF is counting on your employer's super contributions to service the loan).

While this is true, the structure of holding a negative geared property in a SMSF, with salary sacrificed super contributions going in to cover the negative cashflow component, is one way to buy in your SMSF and achieve a tax benefit outside of the fund for the negative cashlow.

Further, your comments may be applied to ANY negatively geared property - that is, if you hold a -ve property in your own name then your choices of taking time off work are limited (as the property is relying on salary income to supplement the losses).

 

[deejay]

Yeah the pitfall would be that it impacts the SMSF's serviceability for the loan

Your SMSF really shouldn't be so close to the wire that this is an issue - that would call the risk management component of your documented investment strategy into question. The pitfalls are more complicated than that.

1. The Trust Deed of the SMSF must allow insurance policies. Otherwise you'll be in breach.
2. Release of the funds from the insurance policies must be allowed by BOTH the insurer AND the SMSF - again, a Trust Deed alignment issue. If you get this wrong, either (a) the SMSF has a liability it can't service (because the wording of the Trust Deed assumes an insurance payment but the insurance policy didn't pay out), or (b) the SMSF receives an insurance payout that it is legally unable to pass on to the person insured.
3. The tax treatment of income protection payments may be different on what it would be if you bought in your own name (depends on a lot of things, including whether you claim a tax deduction on the premiums).

Like I said, these are expert issues. It can work well, but handle with care.

 

[deejay]

Further, your comments may be applied to ANY negatively geared property - that is, if you hold a -ve property in your own name then your choices of taking time off work are limited (as the property is relying on salary income to supplement the losses).

True, to some degree, but you can still work overseas in that scenario without difficulty. Whereas your SMSF strategy (if it relies on concessional superannuation contributions) revolve around the super guarantee and/or concessional treatment of employer contributions, which you can't get from an overseas employer.

 

[bene313]

True, to some degree, but you can still work overseas in that scenario without difficulty. Whereas your SMSF strategy (if it relies on concessional superannuation contributions) revolve around the super guarantee and/or concessional treatment of employer contributions, which you can't get from an overseas employer.

My understanding was that a resident taxpayer working overseas who has no super guarantee support from the overseas employer, is entitled to make personal concessional super contributions due to that lack of support.