Caveats and Tips on buying OTP in Brisbane with SMSF ?

Discussion in 'Property Finance' started by JohnHenry, 21st Jun, 2015.

  1. JohnHenry

    JohnHenry Mister

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    People,

    Since I live in NSW area, I'd like to know what's the caveats and risk when buying investment property in Brisbane (Off The Plan) using my Superannuation (through SMSF) ?

    Since the price is lower than Sydney and I have got enough Super balance to cover the deposit (20%) I wonder if anyone here knows what things do I need to do or setup.

    Thanks.
     
  2. Terry_w

    Terry_w Member

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    What if the fund cannot get finance?

    What if the laws change regarding limited recourse borrowing?

    Have you sought legal advice on what name should go on the contract, drafting of the custodian trust deed, how to avoid triple stamp duty?

    Is a personal guarantee required by the vendor? How do you limit this?

    Is off the plan a good investment in general? What about the area?

    What if values drop?

    What if the fund cannot complete the purchase for other reasons - illness etc.

    Is the trustee even permitted to invest in such a property?
     
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  3. JohnHenry

    JohnHenry Mister

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    ok, for that one highlighted above I guess I'll have to negative gear it or pay it more out of pocket.

    Does the bank can force me to sell it ?
     
  4. Terry_w

    Terry_w Member

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    a drop in value before settlement will mean the fund has to come up with more cash as the loan will be less.
     
  5. CosmicTrevor

    CosmicTrevor Member

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    There is plenty of advice on these forums that can help you.

    The general feeling you will get is OTP is a relatively higher risk than established, simply because you are;
    1) buying a product that doesn't exist yet
    2) for which the lending/borrowing environment is undergoing some change and this may affect OTP more significantly because you go unconditional with the contract for sale before you have an approved loan.
    3) in all likelihood paying a premium for the profit margin of the developer
    4) potentially buying a property that won't suit a local owner occupier (small generic apartments in high density developments) and this limits your CG in my view.
    5) signing a contract that is entirely in the developers favour.

    Having said this I have done 2 Brisbane OTP in my SMSF in the last 18 months and I was mindful of the risks and am happy with the results.

    OTP marketing is slick - put it all to one side and focus on numbers and other data; location, likely yield, likely holding costs, size, price, finishes and inclusions, car park.

    Marketers will have answers for every concern you raise, it is imperative that you stick to your own plan and not take their comments as the truth.

    Trev
     
  6. RPI

    RPI Member

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    OTP contracts in QLD will not allow you to Caveat, assume that goes for elsewhere as it is financiers requirement.

    A lot of people buying OTP want to try and negotiate some of the terms of the contract, although the developer may be okay with it, their lender may not.

    OTP Contracts
    We draft a lot of these.
    When you go to a commercial loan for your development, your lender will have their legal team review the contract for your sale. So we draft an OTP contract for the developer, put it together with the disclosure document and then send to the developer's lender for legal review. Different banks seem to want slightly different wording, clauses etc in them.

    Buying SMSF
    We draft a lot of bare trusts for SMSF
    Different banks have different requirements as to whose name is on the contract, whose is on the transfers ,the wording of the bare trust deed etc. You need to check with your lender and get that sorted before you go to contract or you may find yourself needing to shell out for a deed of rescission to enter into a new contract.
     
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  7. Redwood

    Redwood Member

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    Hi there -

    Risks of OTP - well there are many. Refer to earlier posts which have them covered.

    Quick points:
    1. Review the contract carefully, look at the terms of the contract and review plan of subdivision and compare that to the brochure that has been presented. i.e measure the real size of the apartment
    2. Cover stamp duty off by stage of completion - include as special condition to ensure no nasty surprises
    3. Review finishings of the building - i.e see alot of dodgy jobs on completion so specify what you want with colours, number of coats of pain etc....to your satisfaction
    4. Valuation Risk - huge - off the plan may include large commissions to the seller, this may hurt come valuation time. If your valuation comes in low - you will fund from the smsf - your circumstances may change during this time
    5. Sunset clause
    6. Execute the bare trust before the contract of sale and ensure the SMSF is set up before the date of the contract also - this is a common mistake
    7. Get a pre-approval to determine your real borrowing power - i.e can I afford this property?
    8. Name on contract is not your SMSF, seek advice on this to ensure no double stamp duty
    9. ensure its a one part contract i.e car park and storage cage on same title
    10. Ensure your trust deed allows borrowing and review your investment strategy
    11. Be ready for 50% LVR in 2 years time on off the plan, so review your funding model
    12. Consider completed stock rather than off the plan - generally you can negotiate the stamp duty saving with the developer.

    Thats a brainstorm - its not something you want to do yourself - be sure to partner with someone that will take you from start to finish, otherwise the process get can a little messy.

    Hope that helps

    Cheers Ivan
     
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  8. Rolf Latham

    Rolf Latham Member

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    Dont .......... unless you have cash

    ta
    rolf
     
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  9. JohnHenry

    JohnHenry Mister

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    Investing in SMSF is possible before the loophole is closed by ATO/APRA

    Rolf,

    My understanding after approached by one of the sales agent during the Melbourne & Brisbane Property Seminar in Sydney last weekend is that I can use Leverage system by having smaller amount of money in my Super to buy cheaper OTP property in those two cities mentioned above.

    Eventhough my balance is under $50k, because the rest can be topped up from my out of pocket money. Hence I ask this simple question here in this trusted forum.

    I guess the answer is not that simple but definitely possible before this tax loophole is closed by ATO/APRA soon (again I heard from the agent, but not sure when is this going to be put into effect).

    Therefore, I'll look for a some SMSF expert in Sydney area to assist me with this investing so that I don't get fined by ATO due to some silly mistakes.
     
  10. Terry_w

    Terry_w Member

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    Don't even consider it.
     
  11. JohnHenry

    JohnHenry Mister

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    Cost required in investing thorugh SMSF

    I thought so...

    Because as my understanding I need to have at least $100k to be able to buy the apartment starting from $500k for one bed room unit in Melbourne or Brisbane OTP (which I've been suggested by SS property experts here not to buy).

    Hence I could requires more for already existing house / apartment in the same city.

    Anyway People, many thanks for the suggestion and the explanation, I guess I'll try it once again over the next 5 years and hopefully ATO doesn't close this loophole by then.
     
  12. DaveM

    DaveM KFC Buyers Agent

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    And dont forget the 10% cash buffer required now post settlement
     
  13. JohnHenry

    JohnHenry Mister

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    Dave,

    Which 10% you means ? is it in my Super account or in my Offset account ?
     
  14. DaveM

    DaveM KFC Buyers Agent

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    10% of the asset value to remain as cash in the SMSF. So if you purchase something for $400k you need $40k left in the fund after costs.

    You will also need minimum 35% deposit + costs (stamps, trust setup, legals)
     
  15. JohnHenry

    JohnHenry Mister

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    Investing in SMSF cannot be highly leveraged

    Whoa... 35% deposit for an Investment property ? I never heard of that caveats.

    So I guess it is 35% deposit + 10% of the asset value in the super balance amount is required from the total property price.

    is that correct ?
     
  16. DaveM

    DaveM KFC Buyers Agent

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    35% + costs (stamp duty, valuation fee, custodian trust setup, corporate trustee setup, legals)
     
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  17. JohnHenry

    JohnHenry Mister

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    Many thanks for the details Dave.
    yes, my balance is not enough to buy anything decent, not even OTP :)

    I'll think about it next 5-6 years:D
     
  18. S.T

    S.T Member

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    See you in 5-6 years time
     
  19. JohnHenry

    JohnHenry Mister

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    See you all in Propertychat.com.au forum

    See you in the other Forum S.T ;-)
    Propertychat.com.au
     
  20. CosmicTrevor

    CosmicTrevor Member

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    Seriously, walk away. If your balance is under $50k direct property isn't an asset class that you should consider. This is not financial, legal or professional advice - it is just plain common sense.

    My guess is that someone is trying to line their own pockets at your expense.

    You need to plan on a 20% deposit if you intend to approach a bank for a loan - that is if you have a Corporate Trustee established. Otherwise you will need 30% - but no one should be going into an SMSF without a Corporate Trustee in my opinion.

    Add a minimum of $5k for legal and bank fees over and above the normal (ie conveyance and application) per IP.

    Plan for a cash float in your SMSF of 10% of the property value - but stick it in an offset account to the loan if your lender offers it.

    You must setup your entire structure first and have it done by experts, not a property salesperson.

    Based on your posts I would pretty much stop right now, I smell a rat.

    Trev