Drawbacks of buying resi IPs in SMSF?

[GreenGoblin]

Just read the article in this month's API re SMSF and am trying to learn as much as I can about them. Have read some articles on this site - thanks, all, particularly BV for your detailed post.

What are the drawbacks of buying multiple resi IPs in a SMSF? One I noted in API is that you can't borrow against equity in your IP, so the strategy of leapfrogging (Peter Spann and others) can't be done with IPs in an SMSF.

How much of an issue would this be compared with buying outside a SMSF but not relying on cross-collateralising loans (so could only borrow against one IP rather than multiple)?

What other drawbacks should I be aware of?

Thanks,
GreenGoblin

 

[tobe]

governments changing the super rules.
not being able to capitalise interest.
not being able to deduct expenses from other income.
not being able to refi and draw out equity and repeat.
paying higher interest rates.
having to have a large deposit.
only being able to draw an income at a certain age, which might change with the government of the day.
having to leave the proceeds of any sale within super.

 

[Jonathon]

I'm no expert on buying in an SMSF, but the issues that have put me off buying in an SMSF are:

Too much equity is tied up in each property - you generally need 20%-30%+ equity in each house, with no cross collaterisation allowed. This makes it much harder to grow your portfolio quickly by accessing the growth in equity.

Not being able to access the equity for personal reasons. While I'm a long term and don't intend to sell until I retire, I like to have the option available to me to realise some equity at some stage in the future...you never know what you'll want a spare $50k for in 10 years time.

You simply have no idea what this or subsequent governments are going to do with SMSF legislation. We have a very powerful funds management lobby here and SMSF growth is not in their interests, certainly not when property is concerned.

However, on the flip side, if you have a few hundred grand in a super and you feel like diversifying into property, and you're approaching retirement in say 10 years time, then it's well worth discussing with your financial adviser.

 

[GreenGoblin]

So is this strategy better-suited to people closer to retirement, and if so, why? If I plan to buy and hold properties until and into my retirement, why not do so within a SMSF?

 

[bernardp]

It is a good strategy for those closer to retirement due to the current tax concessions on sale of a property when you have commenced pension phase.

The proceeds of sale for a property in a SMSF may be exempt from capital gains tax depending on your circumstances. Again this could change depending on what mood the government is in at the time.

 

[Pat]

Hi Mr Goblin,

I used to love the Green Hornet reruns on Foxtel but Green Goblin is still a good character.

If you have $200,000 in Super it's there anyway. You just need to decide what you want to do with it. Yes you are restricted in the ability to regear with Equity growth etc. but I think that you will find that any analysis with agreed rent yields and Capital Growth Rates you will be well ahead than if you leave your money ungeared in a balanced or market linked fund.

It's an easy decision if you love property.

 

[bespoke]

I'm no expert on buying in an SMSF, but the issues that have put me off buying in an SMSF are:

Too much equity is tied up in each property - you generally need 20%-30%+ equity in each house, with no cross collaterisation allowed. This makes it much harder to grow your portfolio quickly by accessing the growth in equity.

Not being able to access the equity for personal reasons. While I'm a long term and don't intend to sell until I retire, I like to have the option available to me to realise some equity at some stage in the future...you never know what you'll want a spare $50k for in 10 years time.

You simply have no idea what this or subsequent governments are going to do with SMSF legislation. We have a very powerful funds management lobby here and SMSF growth is not in their interests, certainly not when property is concerned.

However, on the flip side, if you have a few hundred grand in a super and you feel like diversifying into property, and you're approaching retirement in say 10 years time, then it's well worth discussing with your financial adviser.

Yes but................................ you have to invest in super anyway. Its not like you can use that super money to advance your PI empire outside of super. And you cant access your super money if it is in a fund as well. So if you have to contribute to super by law why not do it with leverage, even if it means big deposits, etc etc. Compare what you get by plugging away putting your 9% a year in and having that + your principle growing as opposed to your 9% (+ the rent) going towards paying a mortgage on a place worth 3 times your deposit. Or only the rent needed to pay the mortgage and your 9% going towards another deposit. Sure, the avarage person wont be able to amas more than probably 2 or 3 properties in this way but in my opinion thats better than leaving my money in the hands of a stranger.

For instance 100K principle right now increasing in value as opposed to a 300k property that your 100k buys increasing in value.

I think its the way to go even if you are young.

Personally, I am champing at the bit to do a SMSF and invest it in property but cant as I only have a few years of super available to me. I have 16 years of super that the government are keeping of mine that they wont let me roll over (but thats another story). I am 43, so imagine what 20 years of growth on a property would do. I have done the quick calcs and in my opinion a SMSF is way better than the alternative.

Yep the government can change the rules and probably will several times before I retire, I also know that there will probably be at least 1 maybe 2 more "recesions" that will hammer my super before then as well. You can only make decisions based on NOW rules.

Anyway just my opinion.

 

[grossreal]

hi bespoke
I don't post often that you are wrong
if you read my posts
but this is one i have to say
age is not an issue with smsf.
and you can leverage very well with one
at 43 you have 17 years
and thats about 6 properties you can leverage into if not more.
you can use that government super as a form security and it costs about 3k to setup a smsf
oh and your idea that you cant use your super to move your position forward is a bit on the wrong side of where I see it.
yes the 9% is money anyway and you can novate super so put more in if you wish
also super money is before tax so its better to invest this money
I don't setup smsf but have people that do.
for me over 45 smsf is the best type of investing
as the person is usually secure
has 100 or 200k jobs so has a big amount to cover a loan
and put that with an income and you have a very interesting investor
and yes you can be an investor with smsf
it just has to be setup correct
oh and bespoke this is not to flame just to let you know that you should relook at smsf it might be just waht you need but this is not advice

 

[bespoke]

hi bespoke
I don't post often that you are wrong
if you read my posts
but this is one i have to say
age is not an issue with smsf.
and you can leverage very well with one
at 43 you have 17 years
and thats about 6 properties you can leverage into if not more.
you can use that government super as a form security and it costs about 3k to setup a smsf
oh and your idea that you cant use your super to move your position forward is a bit on the wrong side of where I see it.
yes the 9% is money anyway and you can novate super so put more in if you wish
also super money is before tax so its better to invest this money
I don't setup smsf but have people that do.
for me over 45 smsf is the best type of investing
as the person is usually secure
has 100 or 200k jobs so has a big amount to cover a loan
and put that with an income and you have a very interesting investor
and yes you can be an investor with smsf
it just has to be setup correct
oh and bespoke this is not to flame just to let you know that you should relook at smsf it might be just waht you need but this is not advice

Ummmm, I think you should re read my post. I actually agree with you. I think you may have got me mixed up with the poster I quoted.

I am a BIG believer in SMSF property investing and I DO believe that it dosnt make a difference if you are 18 or 50, SMSF in property in my opinion is far better than a managed fund.

I want to do it myself and would do so at any age. The only reason I can't at the moment is because my super fund dosn't have anywhere near enough funds as it has only been going for about 5 years and has taken a hammering in the last couple of years. The other 16 years of super is in a military super fund and this fund (which I did not have a choice of using or not) by law will not allow you to roll over your money into any other fund.

Believe me, if I could do it now I would and its not through lack of trying. I've consulted 3 different professionals on this very matter and they all say I dont have enough.

 

[JIT]

I've changed my tune slightly on this.

If you're younger and it's a choice of investing in property inside of super vs. outside, I would say invest outside.

Except if you intend to purchase a business premises, purchasing in super may be of benefit.

However, if you already have some money in super, then it's a question of is that money best left in shares/managed funds without leverage, or in leveraged property.

For me the answer is simple, leveraged property... even at 50% LVR.

The only problem is whether you have have enough $ in your super to buy a worthwhile property.

That is my problem, same as bespoke.

But further to this, I believe there are still some ''unresolved issues'' regarding the whole property warrant setup, so I am not rushing in to it for this reason too.

As an aside can you invest in shares with leverage in SMSF? Is this via instalment warrants?

 

[tobe]

The major drawback for property in super is still being able to leverage off increase in equity. As the super loans cant be xcolled and cant be refinanced, the equity build up cant be accessed without selling. So an active property investor outside super would have a much larger property base over time than one inside super could have.
Happy to be prooved wrong, if anyone knows a way around the refinancing rules within super?

 

[bespoke]

The major drawback for property in super is still being able to leverage off increase in equity. As the super loans cant be xcolled and cant be refinanced, the equity build up cant be accessed without selling. So an active property investor outside super would have a much larger property base over time than one inside super could have.
Happy to be prooved wrong, if anyone knows a way around the refinancing rules within super?

Yes all the draw backs are true... but you are comparing 2 different things. 2 different wealth vehicles. Why cant you do both?

My point is ...you have to have super wether you like it or not. The factors of accessing the equity although not ideal, are in my opinion irrelevant.

So you cant access equity,.... so what... you can still play within the rules and have a far bigger super payout than just plugging away with your 9% and the interest on your principle.... and as well have your other IP's outside of super.

I cant see the problem???????

 

[BV]

Yes but................................ you have to invest in super anyway. Its not like you can use that super money to advance your PI empire outside of super. And you cant access your super money if it is in a fund as well. So if you have to contribute to super by law why not do it with leverage, even if it means big deposits, etc etc. Compare what you get by plugging away putting your 9% a year in and having that + your principle growing as opposed to your 9% (+ the rent) going towards paying a mortgage on a place worth 3 times your deposit. Or only the rent needed to pay the mortgage and your 9% going towards another deposit. Sure, the avarage person wont be able to amas more than probably 2 or 3 properties in this way but in my opinion thats better than leaving my money in the hands of a stranger.

For instance 100K principle right now increasing in value as opposed to a 300k property that your 100k buys increasing in value.

I think its the way to go even if you are young.

Personally, I am champing at the bit to do a SMSF and invest it in property but cant as I only have a few years of super available to me. I have 16 years of super that the government are keeping of mine that they wont let me roll over (but thats another story). I am 43, so imagine what 20 years of growth on a property would do. I have done the quick calcs and in my opinion a SMSF is way better than the alternative.

Yep the government can change the rules and probably will several times before I retire, I also know that there will probably be at least 1 maybe 2 more "recesions" that will hammer my super before then as well. You can only make decisions based on NOW rules.

Anyway just my opinion.

Agree 100% and property investing through super does not need to be fully flexible.
it's the gearing what counts. What would you do with that money anyway?
I also see my SMSF as another investment vehicle and I intend to take full advantage of it.

As many of you know I did buy my first IP in super
http://www.somersoft.com/forums/showthread.php?p=569533#post569533
and now I'm salary sacrificing heavily so I can invest in other areas.
IMO Investing through super is much better because of the tax advantages.
For example, if I want to spend $120 to buy shares outside super I'll have to earn $200 before tax.

But, if I salary sacrificed that $200 and put it straight in super
my SMSF would have $170 to invest (smsf pays 15% tax) and if I also have other income from shares paying my super 30% franked dividends
I could end up making 15% profit as well.

Ofcourse if you need the money now, by all means, pay your tax and invest what's left of it outside super but if you are middle aged like me we should be thinking of our retirement and finding ways to boost our superannuation savings.

After all, we don't want to rely on the age pension, do we?