Property Investing in SMSF

H

hysterical

Hi

Just attended a seminar yesterday on investing in property using SMSF and an idea came to mind.

1. Buy an investment property using SMSF
2. Rental income + 9% contribution will be used to pay P&I of the loan (should be sufficient)
3. Sell the property after 5 to 10 years (assuming there is growth) and pay 15% CGT
4. Repeat step 1 to 3 again

Now, fast forward to 5 - 10 years before planned retirement age
1. Buy property that you intend to live in upon retirement and rent it out as an IP
2. Upon pension / retirement age, withdraw assets from SMSF (including the property) without trigger CGT or Stamp Duty and move in.

Is the above idea sensible and any pitfalls / disadvantage to this ?

Cheers
 
Hi H

First part of the plan sounds good and to add a sweetner to the deal in Accumalation phase the CGT is only 10% and not 15% where the asset has been held for more than 365 days.

In saying this i am not sure why you would even consider selling the property.

If the asset is sold in Pension phase there is no Tax payable.

Second part has a pitfall in that you cannot live in a property which is owned by your SMSF irrespective of whether you are in accumulation or pension phase.
 
Qlds007 said:
In saying this i am not sure why you would even consider selling the property.

If the asset is sold in Pension phase there is no Tax payable.

Second part has a pitfall in that you cannot live in a property which is owned by your SMSF irrespective of whether you are in accumulation or pension phase.
Click to expand...

Hi Qlds007

Selling the property to boost your SMSF balance and get a better/more expensive property the next time ?

Can you not live in the property upon retirement and draw out your asset (including the property) from your SMSF ?

Cheers
 
hysterical said:
Hi Qlds007

Selling the property to boost your SMSF balance and get a better/more expensive property the next time ?

Can you not live in the property upon retirement and draw out your asset (including the property) from your SMSF ?

Cheers
Click to expand...

yes you can transfer the property out of the fund upon retirement and live in it.
 
Selling means CGT (it is low though!) an RE agent fees, lawyer fees, loan discharge fees etc.

Then when you buy the replacement there are stamp duty, lawyer fees and loan fees again!!.

What about just buying in the SMSF with as high an LVR as possible and then put all income into a 100% offset account (I mean income of the fund such as rents and contributions). Save up there, and save interest too, until you get enough for the next property and repeat the process.
 
Good advice Terry but as you know there's only a few SMSF lenders, and even fewer of those who offer an offset account!
 
how about, IMHO,

1 buy an investment property in your own name
2 use the rental income and negative gearing benifits to pay it off
3 refinance whenever there is capital growth and repeat

No crazy discount on CGT, but then we arent selling, so its actually cheaper to refinance (which you cant do in super). No auditors or trustees to worry about paying, and no need to spend time worrying about governments changing super rules (though granted you could worry about governments chaning negative gearing). No need to pay 2% above the odds and a whole heap of fees to get a lower LVR loan, no need to make special plans for how to finance improvements to the property.

As for the second part about an eventual O/O property, apart from the issue of capital gains tax (and are you going to sell your dream OO property?) You can do exactly the same plan outside of super either as an investment property to start with, or just continually trade up OO properties which are CGT free.

The only reason I can see wanting to invest in property in super is if they were fully invested already and were reaching lending capacity They could then use the 'spare' 9% employer capacity to further their holdings.

That said if they were that exposed to property, buying another residential property in super might not be the best idea, I suggest the best use for super for property investors is to leverage insurances through it and diversify investments.

Perhaps someone closer to retirement may have diferent advantages, but from the example below, I take it the recomendation is for someone with at least 20 years to go until retirement.
 
Tobe

a SMSF fund can refinance a loan. Additional borrowings are not possible now - but I wonder if this could change in the future.

Another reason to use a SMSF is for the greatest asset protection benefits.

Also some may be able to contribute to super and claim a deduction for this.

Estate planning - you could want your assets to stay out of your will so as not be fall into the wrong hands if the will is challenged.

Tax exempt when in retirement phase is a huge advantage.

But as you say age is a big factor. Contributing extra to super may mean waiting longer for 'retirement'.
 
The only reason I can see wanting to invest in property in super is if they were fully invested already and were reaching lending capacity They could then use the 'spare' 9% employer capacity to further their holdings.

Very surprised to hear a broker say this. The concepts of asset protection, asset continuity, and CGT free capital realisation ( or 10% CGT at worst) make resi property via an SMSF a very attractive wealth creation strategy. But most of all, the concept that all things being equal, a gearing strategy will see an SMSF significantly better off than a non gearing strategy at pension age. It's a no brainer. Unless the non geared SMSF strategy I presume you are more a fan of ( equities, cash accounts or managed funds) start returning 10-15% per annum, how could a non geared strategy ever mathematically out perform a geared strategy?

Instead you're advocating;
1 buy an investment property in your own name
2 use the rental income and negative gearing benefits to pay it off
3 refinance whenever there is capital growth and repeat

That's fine, and it's strategy used by hundreds of thousands for decades, but the two strategies ( individual and smsf) can operate simultaneously, without any issue. One doesnt preclude the other, and unless you put your clients into an SMSF lending structure that requires a PG, you aren't having any impact whatsoever on the individuals capacity to grow a portfolio.

Not sure where your views on low LVR, 2% above the odds rates comes into it either? Remember lenders are offering limited recourse loans so if you think its unreasonable they dont offer 90% for SMSF you arent considering their risk. Plenty of 80% options available. Thats more than sufficient for most SMSF's, because borrowing capacity is something you arent factoring in . ie - most funds can only qualify for modest loans so they generally only borrow 60-70% anyway. For higher income funds, 80% is more than enough. Re rates- there are plenty of products available at Standard Variable rate or lower.There are also fixed rates in the mid 6's. SMSF products arent yet free for all's giving away 90 or 100bpts, but they're certainly much more competitive than 2 or 3 years ago.

You may want to do some reading on the draft rulings relating to property improvements, released by the ATO in September and October 2011. May help clear up some of the misconceptions around the issue.
 
NickZed said:
Hi Terry - I was wondering if you might embelish...which organisations might these be?
Thanks
Nick
Click to expand...

Hi Nick

You should be discussing with your broker. I am going from memory, but think one was bendigo and the other st george. BTW the cheapest rate i have seen for a SMSF is 7.04% with a lender I shall not name - compared to 7.42% with st g.
 
Last edited:
thanks guys....I just legged it down to St George and had a chat to them...then had a chat to my broker...he was aware of the St George Product but not the other bank...
 
Ive seen a limited recourse loan at 80% lvr, with a rate of around high 6.9s, it was built on a bank bill + margin.

mind you, there are sugnificant other borrowings for this person who is a cash cow
 
Terry_w said:
Hi Nick

You should be discussing with your broker. I am going from memory, but think one was bendigo and the other st george. BTW the cheapest rate i have seen for a SMSF is 7.04% with a lender I shall not name - compared to 7.42% with st g.
Click to expand...

Hi Terry

Sounds like a fixed rate at low 7.04%. I saw a mortgage manager lender new to the SMSF borrowing space one a month ago offering SMSF 3 yr fixed at 6.39% but guessing that this may have since changed.

The dragon still has 1, 2 & 3 yr fixed rates for SMSF under 7% though.
 
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