Growing your super property portfolio, within the rules!

[Cozzie]

I have been looking at this idea of managing my own super through property now for a couple of months now and the overriding problem that kept popping up was that you can't cross collateralise. In other words it's against the super laws to use the increased equity that may grow on a property to fund your next property. Also there are no negative gearing opportunities, so any tax benefits that may exist such as interest and depreciation are really wasted. I guess the main tax benefit comes once you meet the minimum age to access your super.

I am looking at a good property that will take all of my super funds to finance it. The deal is ok, in as much that the property will be paid out in full in 15 years but that is it, no other properties, just sit back and wait.

I thought about this for quite a while, then through reading this forum it occurred to me that the ONLY way a superfund can increase it's property portfolio within the rules as such, is through cash or in other words cash flow positive properties.

This is a bit of a hard pill to swallow for me as I’ve always been a fan of negative gearing and have mainly looked for properties that were positive cash flow (when the depreciation was included) or if not I would tip in a bit to cover it. The decision making process was around growth, tax benefits and cash flow. But to actively look for properties that have a great yield (first) and possible growth (second) and the tax benefits don't matter is a different mindset.

But I can't see any other way through super that's going to work. So the scenario is that you use your available super to buy only cashflow positive properties that have a possibility of some growth. I know there is a belief out there that you can't have it both ways ( cashflow positive and growth) but I believe there are, if you look long and hard enough. Through a mix of selected residential and commercial properties I believe it may be achievable. Then with the extra cash from these properties and my super contributions I move on to the next property all within the super rules. The main difference with this scenario and the deal in the second paragraph is that the portfolio keeps growing in this scenario.

I would plan to run each property as interest only (for 5 years) then as the interest only period expires one by one, transfer them over to P & I. After 5 years I believe the rental increases would cover this and keep the whole concept moving forward. I know this concept has been around for quite a while and there has been many books written about it (i.e. Steve McKnight) but I can't see any other way my superfund can expand.

I believe this could take a while to get up and running if starting out with only one property but luckily I have sufficient super to kick off with sufficient properties to be self sustaining.

I know some people are going to comment on having super spread across all areas of investment and I agree totally but I'm just putting up this concept up for comment as a stand alone.

Please, what are your comments, come on all of you devil's advocates, I would love to hear from you. Is there any other way to increase your portfolio within the super rules?

 

[Rob Williams]

I've been going through much the same process. My brain is starting to hurt just running the various scenarious.
I'm leaning toward keeping any future negative geared properties outside if my (yet to be established) SMSF and looking at putting a positive geared, positive cash flow property into the fund.
I'll watch responses to this thread with interest. Thanks for starting the ball rolling.

 

[Jonathon]

On a slightly different angle to this, a big advantage for me with putting a property into my SMSF is that the equity is secure from creditors.

I carry a very real risk of being sued, but I can buy a property in my SMSF and leave it there, gathering equity over the next 20-30 years, safe in the knowledge that my creditors can't touch it. (under most circumstances)

Getting a tax deduction for the purchase itself (or principal repayments) is also rather advantageous.

Also, as I hope to never have to sell a property until I retire, paying zero CGT is very appealing..notwithstanding of course than future governments may (will) raid super funds and rein back some of Costello's super tax cuts.

I haven't actually put a property in my SMSF yet, but I'm considering it for my next purchase.

 

[josko]

Hi all,

I purchased a property with my SMSF nearly 2 years ago. That property is now cashflow positive.

Firstly: There are two ways to purchase property with a SMSF. I went this way:

My Family trust went into a Joint Venture with my SMSF. Apparently less costly to setup. Therefore my Family Trust was responsible for the loan and my SMSF was the investor.

Secondly: With this set-up I have found negative gearing a property in a SMSF not as advantageous as I had imagined. I am now relieved to be positively geared.

Disadvantages:

1. I was having to come up with the interest payment shortfalls myself.

2. At the end of the tax year I would have to find more money to put back into the SMSF account for the portion rent my SMSF had received. Regardless of the fact the property was NG.

Advantages:

1. My Family trust could refinance and pull out any capital growth and reinvest elsewhere. Keeping in mind that my SMSF was entitled to a percentage of that Capital Growth.

Cozzie: There is no need to Cross-Collateralise. You take out a seperate loan for the next purchase.

Regards JO

 

[lisag]

I have been thinking of the same thing as well, except I am not self employed and my employer contributes towards my super. Which I though would benefit me as there would be rent and employer contributions as money to finance the loan, and very little out of my pocket.
Any other thoughts to this situation???

 

[BV]

I would plan to run each property as interest only (for 5 years) then as the interest only period expires one by one, transfer them over to P & I.

Cozzie

Why would you do this?
Isn't it better to go P&I so that you pay down the principal and have a progressively lower interest component?

What would you do if you have money leftover after paying the interest?
I guess you could be buying shares with it and this could be a good thing in this environment but the money won't be enough to buy another property.

 

[Belu]

i am a long way off from a SMSF (currently 23 so not enough in super to worry about) but if it was me I would use my SMSF to invest in the regional areas and other situations that offer short-term positive cash flow with the benefit of long-term CG.

Eg: regional towns (not mining, long term -CG possibilities)
inner-city apartments in older blocks with large open plan spaces; and
managed apartments whereby they can just tick over for the next 10 years giving +CF and if they stopped being managed apartments massive CG increase

anyway, that is how i would use mine if it existed, in other areas than I would be looking at with non SMSF funds.

 

[373au]

I have a property in a SMSF, the loan has a LVR of 65% so its cash flow positive by about $5k pa, I use this $5k to buy shares.

You can negative gear in a SMSF but you have to make up the shortfall.

You can also claim everything you normally would claim such as depreciation interest etc, the only difference being in a SMSF it has a flat tax rate of 15%. So every thing is taxed at that rate. When outside of a SMSF your deprciation gives you a return of what your marginal tax rate happens to be.

Spud.

 

[Cozzie]

Cozzie

Why would you do this?
Isn't it better to go P&I so that you pay down the principal and have a progressively lower interest component?

What would you do if you have money leftover after paying the interest?
I guess you could be buying shares with it and this could be a good thing in this environment but the money won't be enough to buy another property.

Thanks for your input BV,
The reason is that I'm trying to accrue cash to buy more properties.The agenda is to try and grow the portfolio every couple of years(through cash only deposits) as soon as possible while interest rates stay low
Cozzie

 

[jsj]

I find this very interesting as my super has been dwindling away in management fees for some time and I would prefer to buy property with it. Due to the low amount available, I am considering the purchase of a vacant block in a remote area. I didn't realise that you could borrow for such a purchase. Is it a standard mortgage arrangement with LVR and interest rate?
I had a client years ago who bought two blocks, waited for the growth, sold and bought 4, he's probably retired now....

 

[Player]

Allow me to share our super story. Set up SMSF in 1999. Combined cash transfer from my wife's and my own existing funds were around 100 K. I was told that wasn't enough to run your own fund......I say nonsense.

Invested in shares.....buying mostly blue chips brought that figure up to around 250 K by end 2004. In 2005 cashed in the shares and purchased a resi IP cash.

During that time I also transferred a commercial IP I had in my own name that was fully paid off. You are permitted to do this with real business premises. We don't miss the rents and it is a way of forced saving with tax at 15 %.

Those rents accumulated and I re-invested into shares again and sold out last June (phew) to pay cash for a duplex site in Ballarat that we will develop in a few years.

My strategy is that there will be at least four doors paying rent (maybe five if I also wack an apartment above the commercial holding) or actually maybe even more if we develop the 2005 purchase (750 sq m in central Frankston).

My point is this, the more tenants you end up having the merrier, as at pension phase all those rents are tax free.

That's our strategy.....working so far. We are not near retiring yet, however have some IP's in the SMSF, some in my own name, a couple in trust, nicely diversifies the entities and also the land tax payers.

You can also borrow by way of instalment warrant type products now. Also invest as josko mentions above with SMSF and family trust. Or can also use a unit trust to buy a larger property (say a six pack) and externally you can borrow (neg gear) to buy some units and SMSF pays cash for remaining units. Many ways to skin the super cat .....just need to get creative and stay within the rules.

Ensure that you have an invetsmnent plan. Be guided by accountants and financial planners, however ask plenty of questions to ensure what they're telling you is going to be relevant to your situation.

People over-estimate what they can achieve in a year and often completely under-estimate what they can achieve on a decade.

Our's has been going 10 years now and has grown nicely. We are no where near retirement age.......but all is looking sweet

 

[Jonathon]

People over-estimate what they can achieve in a year and often completely under-estimate what they can achieve on a decade.

That's a fantastic quote Player! To me, property is a get rich slowly scheme.

 

[Rob Williams]

To me, property is a get rich slowly scheme.

I've been at it for nearly 2 years now. Are we there yet .. are we there yet ...
If I'd know it was going to be SO slow, I might not have bothered. Just like the other 95% of the population

 

[Jonathon]

Rob

But where will you be in 15 years time, assuming say 4-5% annual property growth? I don't use any higher than 5% for my wealth planning, if I get more then what a bonus!

 

[Rob Williams]

Rob

But where will you be in 15 years time, assuming say 4-5% annual property growth? I don't use any higher than 5% for my wealth planning, if I get more then what a bonus!

15 years! I'll probably not even still be alive. Guess I'll just have to learn to be patient.

 

[Player]

Festina Lente

I've been at it for nearly 2 years now. Are we there yet .. are we there yet ...
If I'd know it was going to be SO slow, I might not have bothered. Just like the other 95% of the population

Lucky you're not a 95 per center. Actually at the rate of knots you're going you've got most people's heads on this forum spinning.

You have accumulated a commendable portfolio Rob in such a short period.. You know that you should follow your own advice.....hurry up slowly Be patient young man.

In 15 years we'll be sucking on a few long necks (make 'em lights to encourage responsible imbibing at our age) and remarking how wonderful this property investing caper is. Ahh....take time out and smell the bricks and mortar

 

[Cozzie]

Hi Jsj
Yes, most of the big banks have products for smsf lending.If you search this forum with smsf you'll see it's been discussed already.
It is an added bonus as mentioned that you can salary sacrifice into the fund to assist in particular properties that show potential for great growth and may not be cashflow positive (i.e coastal property).
I ran a spreadsheet with properties valued at $1,200,000 total at 50% lvr for 10years.I assumed 5% growth (cpi 3% plus 2%) and rent at 9% (cashflow positive) with increases at 2.5% per annum.The result was interesting.
Cozzie

 

[jsj]

Thanks all for the info.

I will be persuing this further and post the outcome on here.

Cozzie, I like the coastal areas too. long term I particularly like Forrest Beach and Balgal Beach. Low yield but great growth.

 

[PrimeCommercial]

I have been thinking of the same thing as well, except I am not self employed and my employer contributes towards my super. Which I though would benefit me as there would be rent and employer contributions as money to finance the loan, and very little out of my pocket.
Any other thoughts to this situation???

It doesn't matter whether your self employed or not, you can roll over you existing super balance to a smsf and have your employer pay into your fund.
It may become a bit tricky if your super is a defined benefit scheme.

 

[nonrecourse]

A pox on all industry and retail super funds

It doesn't matter whether your self employed or not, you can roll over you existing super balance to a smsf and have your employer pay into your fund.
It may become a bit tricky if your super is a defined benefit scheme.

Another hurdle is if your workplace has an enterprise barganing agreement, (EBA) your employer may be bound by a union agreement that your super goes into the union industry super fund regardless if you are a union member or not. The usual occurrence is when you try to move your super across to your fund you are requirred to keep a minimum balance of $5000 in the industry super fund

And guess what; who do you think earns a pretty penny in directors fees in the industry funds

So the next time you see one of those industry fund TV adverts; think union, think dope ,and give it the channel button fickle finger flick