Our First Smsf Purchase - A Step By Step Guide

Discussion in 'Innovative Techniques' started by BV, 25th Jul, 2009.

  1. BV

    BV Think outside the square

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    Hi cnotoham
    The smsf is doing very well, the equiry is like 80% return so far and i have cash reserves to start building a granny flat.
    I havent bought any other properties inside super because Ive been busy restructuring my portfolio and renovating. I cant think of any suggestion.
    Lending options have changed so u should talk to a broker
     
    Last edited: 15th Apr, 2013
  2. Truly Exotic

    Truly Exotic Property Deal Finder

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    A common myth in the superannuation industry is that you should have a superannuation balance of at least $200,000 prior to establishing a Self Managed Super Fund (SMSF).

    from YIP spam email a few minutes ago,

    since when has this been a myth, how utterly ridiculous

    never heard it until today
     
  3. gettingolder

    gettingolder Member

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    Confused

    Ok, I am somewhat confused with some things mentioned in this thread. I am considering starting a SMSF and purchasing an IP in it. A financial planner I spoke with has told me that to be compliant, the property MUST be brand new and cannot be improved or extended. BV you mentioned a granny flat. We wanted to do that too and were specifically told this cannot be done? Are we getting wrong advice.....? The original thread started also purchased a 'used' property, not new.
     
  4. BV

    BV Think outside the square

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    I'd change financial planner, I'm fully compliant buying old.
    You can build a granny flat provided your super fund has own funds and you don't live in it.
    Improvements are ok as well but its a fine line.
    Do some reading, see the URL's below and do a google search as well

    http://www.bantacs.com.au/QandA/index.php?xq=397
    http://thesmsfacademy.com.au/2012/0...-for-smsf-property-investing-using-borrowing/
     
  5. Terry_w

    Terry_w Member

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    Doesn't have to be brand new.
    Cannot borrow to fund improvements.

    Sounds like you have misheard or been given wrong advice.
     
  6. monalisa

    monalisa Member

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    Hi BV - I haven't read the whole thread, but excuse me if this has been covered already.

    If you have borrowing against the property in SMSF, adding a granny flat may change the nature of the property, which is not allowed - there is a tax ruling which covers this.
     
  7. BV

    BV Think outside the square

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    I do have existing borrowings but I won't be borrowing to build the granny flat.
    I'll look into it when I'm ready.
    cheers
     
  8. Barney118

    Barney118 Member

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    Bill,

    I am interested in your info on the subdivide, what I have read this is not allowed under SMSF, if it was a single house it can be renovated and still a single house but if you buy a property and try to build mulitple units or second house the nature has changed of the investment. It seems crazy as your fund is interested in making profits etc for your investment.
    Barney
     
  9. BV

    BV Think outside the square

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    Hi Barney


    To me renovating or adding a granny flat is about making more money so it isn't changing the nature of the investment.

    You'll find that adding a granny flat is done at council level so as long as you
    don't involve your SMSF funds, the ATO will never know.

    People interpret the rules differently and it is the same with the ATO staff so you'l get different answers depending on who you talk to.
    I've been waiting for others to test the waters with the ATO so sooner or later someone will do this and we will have a clearer picture.

    Alternatively, I'd ask for a private ruling.
    I was actually thinking of leasing half the back yard to my company for 10 years and then adding the granny flat there.
    My SMSF collects say $50/week rent for the land and my company collects the rent for the granny flat.
    In 10 years time I retire, and the SMSF now collects both rents or I sell the entire property.

    These are just ideas I've still got to look into the details and I don't want to upset anyone so I will consult the ATO, my accountant and my SMSF's auditor before I do anything.

    cheers
     
  10. Barney118

    Barney118 Member

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    Bill,

    I was under a similar premise that it would be OK but its nothing to do with council its the ATO restrictions on property investment inside SMSF. If the property was bought with the DA approved etc then it would be OK but adding/subdividing isn't.

    There are many sources that say the same thing, even adding a room to go from 3 bed to 4 bed for instance is OK but the ATO obviously dont want SMSF to compete with business
     
  11. Spades

    Spades Banned

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    How much do you need to have in a SF to start up a SMSF?
    Is there a set figure to setup a SMSF?

    Cheers Spades.
     
  12. greedy2000

    greedy2000 Member

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    From my interpretation of the rules surround SMSF's and borrowing to buy Property.

    - A SMSF by using a limited recourse borrowing arrangement (LRBA) can borrow to purchase a property (generally with a 30% deposit)

    - A SMSF may use a LRBA to purchase a ‘single acquirable asset’

    - Its OK to use Borrowed money to repair and maintain a property

    - Its NOT OK to used borrowed funds to improve a property.

    - Once the loan is repaid the asset can be transferred out of the LRBA and the LRBA restrictions are removed.

    Improving a property is anything like renovating it, adding an extra level, granny flat or subdividing and building another town house next door.

    But what if I'm using my own funds, can I improve my Property? Yes (But with some restrictions). Straight from the horse's mouth (AKA the ATO)

    Subparagraph 67A(1)(a)(i) provides that borrowings under an LRBA cannot be used to fund improvements. However, money from other sources can be used to improve (or repair or maintain) a single acquirable asset. For example, accumulated funds held by the SMSF may be used to fund the improvements. However, any improvements must not result in the acquirable asset becoming a different asset.


    What you can't do to a property in a SMSF held under a LRBA regardless, if you are using your own funds or not is:

    - Buy a block of land, then at a later date decide to buy a house or 2 on it
    - Significantly change the nature of the property i.e. convert the property to commercial premises, i.e turn a house into a restaurant.
    -Subdivide it, or sell off a portion of the land

    what you can do to your house using your own funds

    - add extra bedrooms, add a pool, patio, outdoor area, add a shed and even add a granny flat.

    - granny flats are OK the wording form the ATO is as follows

    "A 'granny flat' is to be constructed in the backyard of a property which already has a four bedroom residence established on it. The granny flat will have two bedrooms, a family room, a kitchen and a bathroom and will be connected to utilities such as electricity, water and sewage.
    The character of the asset would remain residential premises and thus the construction of the granny flat would not result in there being a different asset."




    a table of what is and isn't permitted by using your own funds is under section 35 of the attached link.

    http://law.ato.gov.au/atolaw/view.htm?Docid=SFR/SMSFR20121/NAT/ATO/00001

    Essentially you can improve your property using your own funds as long as your house remains a house. you definitely can't subdivide it or sell off a portion of the land whilst it remains subject to a LRBA
     
    knightm likes this.
  13. greedy2000

    greedy2000 Member

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    Just for simplicities sake and to remove any future issues, I'd do the following:

    - Buy any renovators delights/development potential properties outside of super

    - stick to just buy and hold properties inside super.
     
  14. Spades

    Spades Banned

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    Thanks greedy!
     
  15. Barney118

    Barney118 Member

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    More reading on the issue, it seems you can build a granny flat under the rules or improve using SMSF funds to do so. I suppose that also means build a Dual Occ as there isn't any difference between them. The issue starts when you want to separate them for greater gains on own title.
    You can't use your own money under LRBA I believe as it counts as a contribution.
    I have also read that you could buy a property as say 50-50 share with your SMSF and down the track you buyout the SMSF share but to do so the SMSF has to be pty ltd or banks won't touch it for some reason.
    So how do you pick up that development opportunity under SMSF to be able to buy/ renovate then subdivide to achieve greater profits?
     
  16. D.T.

    D.T. Property Lookerafterer

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    Quite a few Q's regarding obtaining finance for SMSF's 1st IP:

    How is loan serviceability worked out in SMSF? For ease of calculation, say you're on $100k salary per annum. That means your SMSF is receiving $9k worth of super contribution by employer per year.

    Lets say your proposed property has $21K worth of rental income per annum (and probably about the same again of related expenses). Does the bank use $30K or $9k in its calculations? In either case I assume both figures are too low to borrow anything meaningful?

    Can lender specify that evidence of a sacrifice agreement is a requirement prior to approval?
     
  17. greedy2000

    greedy2000 Member

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    Unless you have a large SMSF with lots of funds to spare, I wouldn't bother with buying "development opportunities" within Super. The rules are too tough and the limitations placed on Lending within SMSF's prevents a lot of the things you would want to do (i.e subdivide).

    I would really just stick to "buy and hold" properties in super and buy everything else outside.

    It is possible develop properties within super, but the effort required to do so is significantly higher, you need a lot more of your own capital and at the end of the day you will come to the conclusion that you should have just bought the property in your own name and not bothered with the SMSF to begin with.

    The ATO and Super legislation only let you do very conservative and boring things with your Super. This is to protect the vast majority of Australians that shouldn’t be let anywhere near a SMSF.
     
  18. euro73

    euro73 Member

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    The answer to this depends on which SMSF loan product you use. Broadly speaking ( with the exception of St George/Bank SA) lenders will use 100% of the Super Contribution ( 9K in this example) and 80% of rental income ( $21K in this example) and sometimes, if you can demonstrate that you've been making additional contributions over and above the 9% minimum for 2 years or more, they may accept those extra contributions towards servicing also - But even with that being said, the end result remains relatively conservative borrowing capacity, especially compared with what the same scenario would allow you to borrow outside SMSF ( where they'd take 100K salary + 80% of 21K rental income if you were presenting this scenario outside SMSF)

    Having said that, when you borrow outside your SMSF banks will take dependent children, other debt ( credit cards, mortgages, personal loans etc) into account, but they dont consider these things within SMSF arrangements.

    How does it all come out in the wash? Borrowing capacity within SMSF's is more limited than outside SMSF. But that's OK. Just means you need to properly understand your budget before selecting a property, just like you'd need to do outside the SMSF.

    St George is a very popular SMSF product because they don't require a Personal Guarantee , but their servicing calculator is amongst the weakest. AMP, NAB , The Rock and several others offer far better borrowing capacity, but usually require the Personal Guarantee.
     
  19. Qlds007

    Qlds007 Broker,full time investor

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    Have to disagree.

    We have done around 140 SMSF deals since 2008 and have seen a marked change in lenders serviceability models.

    The increase to 9.25% employer contributions from July 1 has helped and the deeming rate used by many of 3% has also increased borrowing capacity.

    With Tax within Super being only 15% and lenders factoring in a variety of costs in relation to the running costs of the Fund you would be surprised how much you can borrow.

    Recently did a deal on heritage listed residential property for a client who was newly self employed and her husband had very little in the way of employer compulsory contributions. By doing a few add backs outside Super and including their non super rent we managed to get the deal over the line on a 70% lend.

    You can be in arrears on your home loan have credit card debts upto your ears and yet still qualify for a loan inside Super with the right lender.

    Be surprised how many brokers, solicitor have no idea about Super lending.
    Had one today where the clients Solicitors told them that Certificate of currency needed to show the insured as the Security Trustee and they didn't believe me when i told them that was incorrect.
     
  20. see_change

    see_change Apprentice Timing Lord

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    We did out first purchase in SMSF around 18 months ago and have one more already. Return on actual funds in SMSF since then is around 15 % from the capital growth.

    We have an 80 % LVR loan available for our next SMSF purchase. Not sure , but think it's with St George and have serviceability to get one more

    Simple strategy

    Soon to have four properties . This effectively becomes an index pension . Contributions and planned lump sum contributions will pay this off . I'm not planning on retiring from work but will continue to work part time , because I like my job ( most of the time ) and job will pay for daily living expenses so the Super can pay for the fun things .

    Cliff