Buying under SMSF - house with land vs units

I am currently tossing up between buying a house with land (which I tend to always do) vs buying an apartment in Sydney under my SMSF

I know apartments give better rental yields but as a investment preference I prefer the greater capital gains of land. But as this is my first SMSF purchase, is there any special considerations I may not be aware of when buying under a SMSF as far as this choice is concerned?
 
I am currently tossing up between buying a house with land (which I tend to always do) vs buying an apartment in Sydney under my SMSF

I know apartments give better rental yields but as a investment preference I prefer the greater capital gains of land. But as this is my first SMSF purchase, is there any special considerations I may not be aware of when buying under a SMSF as far as this choice is concerned?

Hi Scientist

House with land... as in existing house that you are looking to buy and hold and look for capital growth/ rental yield? or house and land package (I assume not).

In terms of apartments, depends where in sydney and if off the plan or completed stock. You will find some developers will offer a rental guarantee off the plan depending on location and the developer, however you would want to ensure the valuation will come in at the price you want not below. Do your due diligence on the developer and areas you wish to buy.

Also you would want to consider how you will purchase the property, i.e through cash in the SMSF or through borrowing in the SMSF. This will depend on your superannuation balance. I assume you will need a borrowing unless you have $500k in the SMSF cash balance.

For SMSF needs to be one part contract, and if you use a borrowing seek advice from an SMSF Specialist to ensure it is structured correctly and of course that you are educated on the structure. Consider finance costs and accounting/ legal fees with the set up of the structure.

Hope that helps!

Cheers, Ivan
 
All the normal rules apply. Go for whatever makes the most money.

You may consider the tax aspects. A SMSF can negative gear but any tax saved will be 15% as this is the top tax rate.

Maybe also consider price - generally best not to go too big in SMSF as this can have succession consequences - such as property needing to be sold on death of a member.
 
In my view the SMSF rules sway me towards higher yielding property, possibly with reduced capital gain over non-SMSF preferences. The reasons for this are:
  1. tax rate on positive cash flow only 15%
  2. capital gains are "locked in". ie you are unable to unlock the equity as you can outside of SMSF without selling
  3. properties typically with low yield (ie subdivision potential, large land component) - may not be able to unlock this value due to "same asset" rules preventing some asset changes within SMSF
I agree with Terry that it still needs to be a good investment and that is perhaps the most critical part.
 
This is a good question. I have not made my first IP purchase in my SMSF. I have been tossing up between apartments/units (established or off the plan), house and land package or an established house.

Advantages of apartments or units off the plan is lower initial cost, saving on stamp duty and higher rent to price ratio. Disadvantages are potentially lower capital growth.

Advantages of house and land packages are: can be lower cost than established, savings on stamp duty, a chance to build in equity up front. Disadvantages are: location, time to build and unknown build quality.

Advantages of established houses are: higher potential capital growth, you know what you are buying up front, and if you buy in the right location - solid rental income. Disadvantages are: higher stamp duty and higher initial cost.

My IP will be positively geared with an offset account. I have been running the numbers on apartments/units but I can't make them work. I will do house and land as a package or established. Maybe later this year?
 
Hi Perthguy,
It would be good to understand what you mean by "I have been running the numbers on apartment/units but I can't make them work" - can you share the numbers?
 
In my view the SMSF rules sway me towards higher yielding property, possibly with reduced capital gain over non-SMSF preferences. The reasons for this are:
  1. tax rate on positive cash flow only 15%
  2. capital gains are "locked in". ie you are unable to unlock the equity as you can outside of SMSF without selling
  3. properties typically with low yield (ie subdivision potential, large land component) - may not be able to unlock this value due to "same asset" rules preventing some asset changes within SMSF
I agree with Terry that it still needs to be a good investment and that is perhaps the most critical part.

Thank you, this made alot of sense to me. Although I favour (established) house with land, this has made me reconsider.
 
Hi Perthguy,
It would be good to understand what you mean by "I have been running the numbers on apartment/units but I can't make them work" - can you share the numbers?

I don't know much about aparments, so maybe I am looking at the wrong ones but here is an example:

http://www.realestate.com.au/property-unit-wa-mount+lawley-114197171

Asking price $370,000

Rent: $390 per week.

With BoM/St George, Company Trustee, Interest Only Fixed for 3 years at 5.64% the following costs are incurred:

Stamp Duty & Government Charges: $11,980
Application Fee: $1,500
Company Trustee: $550
Setup fee: $500
Legal Fees: $615
Settlement Fee: $100
Monthly Fees: $144
Stamp Duty on Trust: $200
Total Costs: $15,589

SMSF Cash Deposit: $90,000
Loan: $295,589

Minimum Monthly Payments: $1,389.27

Estimated Monthly Rent: $1,690

Gross Return on investment of $90,000: 4.07%

Then you have to account for:

Water Rates: $703.10 PA
Shire Rates: $799.07 PA
Strata Contributions: $1520 PA
Building Insurance: unknown
Landlords insurance: unknown

and suddenly the return on investment (of $90,000) dorps down to 0.71% without insurance included. I suspect with insurance the return would go negative.

Even at 4.07%, my super fund makes a better return. I would forgive this if the apartment had good potential for capital growth... but in Perth, the apartment market capital growth is less than for established house and land in a good area.

If I get a chance, I will re-run the numbers for a house and land example. Also, if I have this wrong, feel free to point out my errors. I am happy to be corrected! :)
 
SMSF - how to make the numbers work

Thanks Perthguy.
I calculate your gross return at 4.01% - similar and as you say with additional expenses probably 0.

I don't think the gross return on deposit in first year is going to look good no matter what sort of property you purchase. Unless property yield is greater than your interest rate and you are cash flow positive but even then its going to be low.

From what I read (and no experience yet) the key is that you divert your concessional super contributions into your SMSF so you pay down the loan - decrease your interest payments, become cash flow positive, pay off the loan, then realise the profits within your SMSF usually by selling the property as you can't use the equity to buy something else.

Usually what I read is comparing buying a property within a SMSF verses outside SMSF and not buying property within SMSF verses other options. The key should be that you can leverage within the SMSF and the property growth is going to outgrow other low risk options over time.

So I think the better way to do the numbers is over say a 10 (or 20) year period and factor in property growth, then compare the profit over that period of time with what you would expect to get from having your money in super but in say fixed term deposits/bonds where your concessional contributions are used to increase your investment in the same. Here you will get your interest and no growth.

Comparing with shares etc will also be useful from a numbers perspective but higher risk and I expect leverage levels are lower and more limited within a SMSF.

And Yes you would want to select a property that would have some growth over that 10-20 year period.

Maybe one of those many people that is buying property within their SMSF has
already done the numbers and can show us to "make then numbers work" - or perhaps the SMSF administrators or SMSF property advisors can.
 
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