Our First Smsf Purchase - A Step By Step Guide

I received an email in the last week (on this persons mailing list) which said that the government has said it is watching closely the level of borrowings within SMSF's and a review of the act allowing borrowing will be looked at in 2012. It was suggested in this newslwtter that anyone considering buying a property within a SMSF should do so within the next 2 years.

Anyone care to comment? Likelyhood of this happening?

Hi Bespoke

In the Cooper Review into SMSF's they have said as a preliminary recommendation that they will review the 2007 relaxation of the borrowing provisions in two years time (ie 2012) to "ensure that borrowing has not become, and does not look like becoming, a significant focus of superannuation funds."

In my view I think SMSF borrowings are here to stay as the take up has not been as great as many may think. This is due in part to the banks conservative approach via low LVR's, high set up costs & interest rates.
 
Thanks for that Mike,

Hubbie and I are very keen to set up a SMSF to buy IP's but unfortunately we dont have enough in our super funds (even combined) to do so.

We are both ex military (I australian ADF and He British) and we cant get to our funds accumulated whilst in the military, which is quite substantial.

My military super is locked up by the government and I cant even roll it over to wherever I want and Hubbies is in the UK and we dont think we can bring it here until he retires.

So all we have in our civilian funds is what we have accumulated in the 6 years since we became a Mr and Ms again.- We were nearly there but then the GFC hit and our super funds went south :mad:

Oh well, such is life!
 
Thanks for that Mike,

Hubbie and I are very keen to set up a SMSF to buy IP's but unfortunately we dont have enough in our super funds (even combined) to do so.

We are both ex military (I australian ADF and He British) and we cant get to our funds accumulated whilst in the military, which is quite substantial.

My military super is locked up by the government and I cant even roll it over to wherever I want and Hubbies is in the UK and we dont think we can bring it here until he retires.

So all we have in our civilian funds is what we have accumulated in the 6 years since we became a Mr and Ms again.- We were nearly there but then the GFC hit and our super funds went south :mad:

Oh well, such is life!

Hi Bespoke

I've had a number of clients who have not been able to transfer their existing super into a SMSF for one reason or another however there other ways of achieving the same outcome although these may not suit everyones personal circumstances.

One way to get funds into a SMSF is to look into related party member loans, again this may not suit everyone and you should seek proper professional financial advice before going to far.

The current legislation does not state who must be the lender, it could be a bank, or equally a member or other related party of the fund and so there are other ways in which a super fund might be geared.

Using money sourced from a related party (eg SMSF member) an indirect loan structure may be used either instead of a direct SMSF bank loan or even in conjunction with a SMSF bank loan.

This can be achieved by the members of the fund borrowing from a bank on a full-recourse basis using an asset in their own name/s. The member/s would then make a limited-recourse loan to the Fund.


The advantage of this arrangement is that the full-recourse bank loan to the member may be much easier to arrange than a Complying Loan directly from the bank to the Fund Trustee.

By the member/s making a Complying Loan to the fund, those monies can be invested within the super environment, notwithstanding the contribution caps that may be applicable.
 
So why do you want to use a SMSF to buy property? What advantages do you see in doing so?

Leveraging up current super balance to provide a better retirement income 30 years from today in complete understanding that it is a risky regulatory environment but the funds are already in this environment.

My view..
 
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The sums (help appreciated)

I am running the sums and obviously it is slightly different when you don't have an income to negatively gear against. For those who know does this make sense?

For the purposes of simplicity, assuming nil other income in the fund.

Year 1
Year 2
Rent
20800
20800
Interest
-24750
-24750
Expenses 1%
-28000
-4000 (note stamp duty for leasehold land expensed)

Gross
-31950
-7950
Depreciation Allowance
8000
7500

Net
-23950
-450

Thanks in advance - and I need to go and talk to the accountant.
 
I am running the sums and obviously it is slightly different when you don't have an income to negatively gear against. For those who know does this make sense?

Not sure why you'd be negatively geared - disregarding the CBA product the most you can borrow is 72%. You should be well and truly positive at that LVR.
 
Sorry deejay,

I may have misled you. I later posted that the CBA SMSF lending is not as generous as they first told me. It was too good to be true.

My model assumes additional lending into the SMSF from another party which can lift the effective LVR. i.e. from an individual such as myself.

(and I am also planning on having a significant buffer for liquidity purposes)
 
So much good information on SMSF borrowing in this thread!

I would firstly like to point out that there is some fantastic information contained in this thread - probably a lot more than what is contained on numerous other websites. :)

Special thanks to Bill (BV) for sharing his experience of buying property with super. Also thanks to others who have contributed such as MikeF, Manoj and euro73 - I know there are others.

As I have been involved in a number of commercial and residential property purchases by SMSFs using borrowings, I thought I would share some useful tips and information for anyone who wants to educate themselves further on the subject.

How much can my SMSF borrow?

I am not a finance broker, however I have found that the maximum LVRs available are 80% for residential property (Westpac) and 70% for commercial property (Laiki Bank). Apparently Laiki Bank is a Greek bank - so who knows where they get their money from :rolleyes:

I have a schedule of the available SMSF lenders from a couple of months ago which can be found here: SMSF Limited Recourse Loan Providers - I know it doesn't contain every single lender - and I have intentionally left some off the schedule.

As mentioned by euro73 earlier, the assessment of serviceability works a little differently with the SMSF loans (good work on the example calculations too ;) ).

I have come across the following calculator from St George which I have found useful to see whether the serviceability aspects of a potential SMSF loan can be met:
St George Super Fund Loan Calculator (excel with macros)

I am not saying St George is the best SMSF loan provider - I simply have found the loan calculator useful.

Now - just because your SMSF can borrow a certain amount - doesn't mean it should. If you can purchase a property in your SMSF with a level of gearing which enables the property to be close to neutral cash flow, then as mentioned by BV any employer contributions / 9% SGC and salary sacrifice can be accumulated and used for future SMSF property purchases.


Member-financed loans

It is always good to use other peoples money to build your investments - but of course doing so comes at a cost - and with SMSF limited recourse loans there is often additional costs (both upfront and ongoing).

One way to reduce these costs is to utilise other external equity, obtain a separate loan / LOC and on-lend to the SMSF (all the same documentation still required).

A strategy which I don't think has been mentioned is the use of a bank limited recourse loan combined with a second member-financed limited recourse loan. In this situation the second lender (say a member or a family trust) cannot take any security or charge over the underlying property.

This strategy I believe is especially attractive to investors and long way from retirement who may have money outside of super, as it enables them to inject some additional capital into the SMSF at the time of purchase - but that capital can be repaid back to them by the SMSF at a later time. I like to think of it as the best of both worlds - tax effective investment (via super) without 100% of the capital being tied up until age 55 plus.


Buying in super vs. negative gearing?

Is buying property with super better than negative gearing?

The two strategies are not mutually exclusive - in fact I believe they can actually compliment one another nicely.

Higher income earners often have higher super balances - so they are more likely to be able to simultaneously buy property with their super tax effectively while negatively gear in their own names with other properties.

Also (as BV hinted) if the SMSF property has negative taxable income as a result of depreciation and capital works deductions, a high income member of a SMSF can obtain significant tax savings via salary sacrificing - they just need to be careful that they do not exceed the contribution caps - especially if they are under age 50.


Other points:

  • Getting the right advice is essential - you will need a good accountant and finance broker who know what they are doing.
  • What is the deal with the CBA SuperGear product? It was almost as if they felt obliged to bring out a SMSF loan product, but then decided to make it so convoluted, restrictive and impractical that no one would want to use it! :confused:
  • What are the common mistakes people make when buying via their SMSF with borrowings?
    Firstly I would say that they don't ensure the cash flow generated from the property is enough to cover loan repayments and other costs - so they are depending on the ability for contributions to cover the shortfall - which is not ideal.
    Secondly is either signing a contract in a different name and trying to change it to the holding trust (trustee company) later on or simply not leaving enough time under the contract for finance approval.
  • Using a SMSF to borrow to buy property is generally going to be more expensive than doing it in your own name - but if done correctly can provide huge benefits including tax savings, asset protection and the ability to access current super to help build a property portfolio.

Apologies for the length of this post - I hope this additional information is helpful and doesn't cover anything already discussed in the thread.

I suggest if you have any questions about SMSF borrowing - please ask them! There are many people who will be willing to answered them.

Kris_Evolved
 
Last edited:
Thanks all for the great info.

I am currently looking at setting up a SMSF this thread has been brilliant.

Cheers, MTR
 
Smsf Ip

Hi everyone,

Thankyou everyone for sharing the knowledge and information. I have been keeping an eye on this thread on and off for quite sometime over the last few months.
We have set-up our SMSF for over a year now and haven't taken a plunge into IP with SMSF yet. We know that we can afford an IP around $400K well within the allowable LVR, say 70%, with the super contributions and rental income, they will be sufficient to service the loan.

We decided it was time to start the gearing into super. So,...this weekend when we put a holding deposit on an "off the plan" apartment in the inner city of Melbourne for its location. When we informed our bank of the purchase, that's when we found out that banks don't provide funds for SMSF purchase off the plan, period!

Has anyone fallen in similar traps? Have we got the whole SMSF borrowing criteria all wrong?

Appreciate to hear comments who have gone down similar path, please enlighten us.

Thanks in advance!


PNS
 
Hi PNS

pssoibly has more to do with the act that regulates it than the banks themselves

EG, you cant get an SMSF loan for a resi build

ta
rolf
 
Hi everyone,

Thankyou everyone for sharing the knowledge and information. I have been keeping an eye on this thread on and off for quite sometime over the last few months.
We have set-up our SMSF for over a year now and haven't taken a plunge into IP with SMSF yet. We know that we can afford an IP around $400K well within the allowable LVR, say 70%, with the super contributions and rental income, they will be sufficient to service the loan.

We decided it was time to start the gearing into super. So,...this weekend when we put a holding deposit on an "off the plan" apartment in the inner city of Melbourne for its location. When we informed our bank of the purchase, that's when we found out that banks don't provide funds for SMSF purchase off the plan, period!

Has anyone fallen in similar traps? Have we got the whole SMSF borrowing criteria all wrong?

Appreciate to hear comments who have gone down similar path, please enlighten us.

Thanks in advance!


PNS



Sounds like you need a savy MB who knows the rules inside out, by the way they change every week. However, your MB should know exactly what the SMSF deems as suitable property criteria, if he does not know, find one that does. I have an excellent MB, absolutely brilliant.

Also, you need to make sure your accountant is a gun in regards to SMSF, and knows his stuff inside out this way you know exactly what to purchase to meet the criteria, otherwise you are wasting your time.

Kitto who posted knows his stuff, I would start reading his material to get you on track.

If you have the right broker he will be able to work with the accountant this is cruical. I have got the two working together to make sure it all falls into place and have the correct structure.

I am in Perth can give you contacts here if required.

Cheers, MTR
 
Hi everyone,

Thankyou everyone for sharing the knowledge and information. I have been keeping an eye on this thread on and off for quite sometime over the last few months.

We have set-up our SMSF for over a year now and haven't taken a plunge into IP with SMSF yet. We know that we can afford an IP around $400K well within the allowable LVR, say 70%, with the super contributions and rental income, they will be sufficient to service the loan.

We decided it was time to start the gearing into super. So,...this weekend when we put a holding deposit on an "off the plan" apartment in the inner city of Melbourne for its location. When we informed our bank of the purchase, that's when we found out that banks don't provide funds for SMSF purchase off the plan, period!



Has anyone fallen in similar traps? Have we got the whole SMSF borrowing criteria all wrong?

Appreciate to hear comments who have gone down similar path, please enlighten us.

Thanks in advance!


PNS

Hi PNS

Seems like your've fallen into a situation that I see on a somewhat regular basis. Firstly you have gone to a bank that probably does not understand SMSF or spoken to someone that has no idea.

You can buy off plan however you need to be able to follow the right steps

However before contemplating buying off plan you need to be aware that the you should exercise caution where there is a long period between the contract being signed and the actual physical settlement date.

A recent press article (http://www.morningstar.com.au/smsf/article/property-problems-for-smsf-borrowings/3250) in fact hightlighted a possible problem.

Also if your looking to purchase off plan you will need to:

1/ See a SMSF professional to ensure that the whole thing is achieveable from beginning to end. There are many (many) issues that you need to consider and getting just one piece wrong can have unplanned & sometimes costly consequences. If you get past this stage you then and only then need to arrange to set up your SMSF (if not already in existence as well as your security custodian (bare trust) structure.

2/ Make sure that your SMSF funds are used as the holding deposit and receipts are kept, as your SMSF fund will need to be in a position to pay for everything before approaching a lender closer to settlement time to borrow the balance required.

3/ Given the above you may then find just prior to being required to settle that; a) the property does not value as required by your lender; b) you then have insufficient resources (including contribution levels) to make it happen; c) this then may lead to you to putting the funds deposit at risk from being lost not to mention the stress of it all and legal implications of not meeting your contractual obligations.
 
Hi Mike,

Thanks for your reply post, you are right in regards to long period between contract and physical settlement brings unforeseen risks.

It is a "two edge sword" situation, my initial rationale was:

1. With little outlay, 10% deposit would give me control over an asset of $400K, assuming the selling price is justified for today's value.
2. The long period between contract and settlement gives me the chance to acquire some capital gain.
3. Even less outlay if one uses bank guarantee for the purchase.

Then again, risks are:
1. Legislative changes in SMSF
2. Three years is a long time, anything can happen.
3. Banks would not commit to lending when there is no physical valuation, making my deposit at risk.

The whole situation is creating too much doubt in our minds whether it has been a right strategy at all in buying OTP just because we aim to gear in super. There must easier ways.

Thanks for the link to the news article.

Cheers,

PNS
 
Off the plan is high risk in any scenario for any lender in current environment. SMSF will possibly not work. What I first established is what the lender wants, what is achieveable as far as lending goes, no point wasting your time.
As I stated a good MB will be able to put $ on the equation, they will look at postcode etc

Start reseaching on the ss, coastmike I believe from Syd should be able to help, as I stated there are posts by Kitto on SS from QLD. It is important to get it right in the first instance.
 
Hi everyone,

an "off the plan" apartment in the inner city of Melbourne for its location. When we informed our bank of the purchase, that's when we found out that banks don't provide funds for SMSF purchase off the plan, period!

Has anyone fallen in similar traps? Have we got the whole SMSF borrowing criteria all wrong?

Hi PNS

Agree - this thread is great. We are in an almost identical (down to the borrowing dollar) situation.

In the SMSF - I think it is critical to be conservative as (1) this is the intent and (2) It is hard (whilst not impossible) to inject liquidity into the SMSF if required.

Given OTP is inherently (perhaps less in your case) speculative and open to revaluation risk, I would be saving it until I had a big buffer in my SMSF to fund it.

I'm treating my first SMSF Direct Property relatively conservatively.

Cheers



Disclaimer: This should not be relied on as advice.
 
Hi BV,

How did you go with your SMSF? I believe it is almost 4 years since you purchased the property under SMSF.

I have just get the structure done and now rolling over most from my existing super to the SMSF. Looking for property next.

I am just wondering if you have more tips from your past experience.

Look forward to hearing from you.

________________
cnotoham
 
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