Agree. In addition to what BV has said, it may be prudent to leave an initial buffer for interest shortfall if the fund is a bit skinny when you start.
This would be needed to appease the lenders I would imagine and to hedge on unforseen early repairs or large bills such as LL insurance, council rates, etc. You can always pay those on quarterly increments, however, a buffer would certainly not hurt
Properties purchased in a SMSF should rarely, if ever, be running at any kind of a loss so there should never be a shortfall unless the property is untenanted.
There are very simple and logical reasons for this; Unlike loans for investment properties bought in individual or company names, where LVR's up to 95% may be available, and where 100% of earned income plus 80% of rental income is assessed for serviceability, SMSF loans work differently. There are much stricter limitations on loans available for the purchase or residential investment property through your SMSF.
Let me explain;
1. Max LVR for most SMSF loan products is 70% (or 72% for STG)
This means that the SMSF must have a large enough balance to contribute 30% towards the purchase, plus costs, plus the costs of establishing the SMSF, bare trust, etc etc. So if your SMSF wished to purchase a property for 400K it would be required to contribute 120K plus costs plus set up costs. If the balance of your SMSF is less than 140-150K, you can see how this would not be possible. This is one of the reasons why most SMSF experts recommend that the balance of a fund should be at least 150-200K before you consider gearing into residential investment property.
2. Serviceability is much more limited when borrowing through a SMSF. Lenders cannot use your normal income. Only the income of the SMSF can be used, which will generally mean 9% of your gross salary ( unless you have been making additional contributions for more than 2 years continuously- then the bank may use the higher figure) The other income they will accept is the proposed rental income, wich they assess at 80%. So in essence, serviceability is being determined by 9% of your gross salary plus 80% of the rental income. For a couple earning 150K, that equates to $13,500 plus rental income.
Here's what I mean. Let's work with a generic LVR figure of 70% and a couple with a combined income of 150K and with a 150K SMSF balance, to prove the theory.
They wish to purchase an investment property via their SMSF valued at 400K. Can they do it?
Purchase Price 400K
The SMSF would have to contribute 30% - 120K
The SMSF would have to cover costs of approx 4%- $11,000
The SMSF has set Up costs- unknown. Lets say 5K
Total Contribution required by SMSF- 136K
Yes, they have enough funds to complete the deal in their SMSF. But can their SMSF get a loan for the 280K required?
Loan Required- 70% LVR ( or 72% with ST G) 280K @ 7% Interest Only.
I/O Repayments $19,600 per year
Rental Income- $400 p/w- $20,800 per year (bank will assess 80% of this, so $16640)
SMSF Income - 9% salary-$13,500. (bank will assess 100% of this- except St G, who only assess 80% of this!)
Total Income for serviceability is $16640 plus $13,500 (or $10,800 for STG)
Is this enough to service a 280K loan? It may well be, but it does demonstrate that borrow capacity and LVR restrictions mean that for most people with a solid above average income and a 150K plus SMSF balance, properties priced around 350-400K are the ideal target. Anything above that pricepoint probably cant be purchased via the SMSF. You can see that it would be an exception to the rule for any SMSF to be able to purchase expensive properties that run at a significant loss at 70% LVR. Id be very surprised if many SMSF purchased properties were negatively geared.
So, lets talk about NRAS aproved properties and SMSF!!!!!!
NRAS properties add additional TAX FREE income to serviceability ( an extra 9K almost), are new, have depreciation advantages, and are priced at the 350-400K price point. Not sure about anyone else, but I see some fantastic synergies here!!!!
