SMSF property investment, no loan

[Harriet]

Hello all,

This may well be a silly question, so please bear with me!

All the info I see online about buying a property in an SMSF is about borrowing money.

What if I have enough money in my SMSF to buy a property outright?

I can do this - right?

And what is the process when there are no borrowings involved?

Thanks,

H.

 

[Property Hoarde]

You can purchase a property cash. It is easier to do this then deal with the bare trust ec...

Just note do not purchase residential property off a related party and if purchasing commercial (business real property) off a related party please ensure there is a legally enforceable lease.

The process is like all property transactions, you find property to purchase, you agree a price, you and the seller sign the contract (please in ensure the contract in in the name of the Fund). You settle and instead of the money coming from a bank loan you take the money to settle from the Superannuation Fund bank account. Note Deposit paid should also have come from Bank account.

 

[Terry_w]

Just because you can doesn't mean you should.

Once a SMSF owns property it cannot take a loan out on the property and use this for further investments.

Generally ungeared property doesn't give much of a good return either.

Have you considered borrowing 80% and parking the cash in the offset?
On the other hand it does cost a lot to set it all up.

 

[Redwood]

Hello all,

This may well be a silly question, so please bear with me!

All the info I see online about buying a property in an SMSF is about borrowing money.

What if I have enough money in my SMSF to buy a property outright?

I can do this - right?

And what is the process when there are no borrowings involved?

Thanks,

H.

Harriet, its a popular question....not silly.

Firstly, SMSFs are not for anyone be sure that you understand the risks and benefits of SMSFs before you proceed (yes, I said risks first), there are a heap of benefits! Margin tax rates or SMSF tax rates.....There are set up costs which will depend on the administrator you choose, ours are $990 for SMSF set up and corporate trustee as guidance.

Process of buying outright is quite simple, you can buy in the SMSF name with NO bare trust. Ensure your SMSF is set up before you sign the contract of sale, pretty standard otherwise. Remember you cannot live in the property if its residential and you must rent it out.

Many of our clients have enough to buy outright, but based on effective SMSF strategy borrow to invest. For instance, and generally speaking, you can purchase outright for $350k in cash, or buy 2 $350k properties using borrowing to invest (there is a scenario to look at). This requires understanding and advice to ensure you understand the structure required as well as finance and structural considerations.

With no borrowings you can find the right property and go ahead.....ensure you have an SMSF set up, with borrowings, seek advice, in both cases actually you should surround yourself with an SMSF expert.

I hope that helps

Cheers, Ivan

 

[Harriet]

Thanks, all. I very much appreciate your advice.

I have indeed researched all the risks and benefits, along with all the legal requirements. My husband and I have decided to go ahead, and in fact, already have the ball rolling on setting up our SMSF. We have a deed, and a company as the trustee. Now organising insurances, then roll over.

Our accountant has indicated we will need the following when buying a property in the SMSF. But I presume most or all of these are only required when borrowing?

• Custodian Trust
• Trustee company for Custodian Trust
• Mentor fee (incl loan assistance)
• Statement of advice for loan compliance
• Preparation of related party-loan documents
• Stamp duty on Bare Trust

Which if these would be required with no borrowings?

Thanks again. I always drop by here when I need answers that don't bamboozle my head.

Cheers.

 

[Redwood]

Thanks, all. I very much appreciate your advice.

I have indeed researched all the risks and benefits, along with all the legal requirements. My husband and I have decided to go ahead, and in fact, already have the ball rolling on setting up our SMSF. We have a deed, and a company as the trustee. Now organising insurances, then roll over.

Our accountant has indicated we will need the following when buying a property in the SMSF. But I presume most or all of these are only required when borrowing?

• Custodian Trust
• Trustee company for Custodian Trust
• Mentor fee (incl loan assistance)
• Statement of advice for loan compliance
• Preparation of related party-loan documents
• Stamp duty on Bare Trust

Which if these would be required with no borrowings?

Thanks again. I always drop by here when I need answers that don't bamboozle my head.

Cheers.

These relate to bare trust:
*]Custodian Trust
[*]Trustee company for Custodian Trust
[*]Mentor fee (incl loan assistance)
[*]Statement of advice for loan compliance
[*]Preparation of related party-loan documents
[*]Stamp duty on Bare Trust

A statement of advice is NOT required,
a trustee company is not required but highly recommended.
Mentor fee: what is this?
Related party docs only relate to related party loans......only relates to property with related party borrowing...
Stamp duty on bare trust - not clear, your conveyancer can stamp your title but this is not clear

None of the above applies to cash purchases.

You have done the right thing with a Corporate trustee so well done. I'm not convinced on the list provided by your accountant, perhaps ask them how many bare trusts they have set up as a mistake can end in a major headache ($$$$)

Remember to ensure your stated investment strategy includes property.

Cheers, Ivan

 

[Harriet]

Thanks. All noted and appreciated.

Cheers.

 

[Harriet]

Just because you can doesn't mean you should.

Once a SMSF owns property it cannot take a loan out on the property and use this for further investments.

Generally ungeared property doesn't give much of a good return either.

Have you considered borrowing 80% and parking the cash in the offset?
On the other hand it does cost a lot to set it all up.

Hi Terry,

Yes, considering these kinds of options . . . the cost is a little scary.

 

[Rolf Latham]

I would have thought an SMSF trustee has some form of duty of care to spread risk

Locking down all of the SMSF cash into one asset doesnt diversicifcation make ?

ta
rolf

 

[Terry_w]

Hi Terry,

Yes, considering these kinds of options . . . the cost is a little scary.

Some costs may be deductible to the fund. And think of the benefits of leverage. get 2 or 4 assets working for you instead of 1 for example - but alway think of the risks as well.

I woudn't use a conveyancer for normal purchases let alone a SMSF, especially if borrowing invovled. If a custodian trustee is used then stamping of the custodian deed should be done in NSW and duty of $50 paid so as to avoid paying stamp duty when the loan is paid out = the title will then need to be transferred from Custodian trustee to SMSF trustee.

Don't forgot the estate planning and succession aspects upon death and incapacity.

 

[Harriet]

I would have thought an SMSF trustee has some form of duty of care to spread risk

Locking down all of the SMSF cash into one asset doesnt diversicifcation make ?

ta
rolf

Hi Rolf,

Yes, we are diversifying; not locking everything into one asset. Property is just one thing in which we'll be investing in our SMSF.

Cheers and thanks,

H.

 

[Harriet]

Some costs may be deductible to the fund. And think of the benefits of leverage. get 2 or 4 assets working for you instead of 1 for example - but alway think of the risks as well.

I woudn't use a conveyancer for normal purchases let alone a SMSF, especially if borrowing invovled. If a custodian trustee is used then stamping of the custodian deed should be done in NSW and duty of $50 paid so as to avoid paying stamp duty when the loan is paid out = the title will then need to be transferred from Custodian trustee to SMSF trustee.

Don't forgot the estate planning and succession aspects upon death and incapacity.

Thanks, Terry. What's your recommendation for conveyancing on a property purchase within a SMSF?

We have a lawyer who usually does our conveyancing. Should I look for someone more specialised?

Cheers.

 

[Redwood]

Thanks, Terry. What's your recommendation for conveyancing on a property purchase within a SMSF?

We have a lawyer who usually does our conveyancing. Should I look for someone more specialised?

Cheers.

Hi Harriet, I use a lawyer for all my smsf purchases. Its important to have a lawyer as you will need guidance on the name on the contract of sale and also a run through on the mortgage documents which are thick - but important, watch for surprises.... i.e personal guarantee.

Chat to your lawyer, if he/she does not know what to put on the contract of sale, they are not a SMSF specialist, then seek advice.

Cheers, Ivan

 

[Terry_w]

Thanks, Terry. What's your recommendation for conveyancing on a property purchase within a SMSF?

We have a lawyer who usually does our conveyancing. Should I look for someone more specialised?

Cheers.

the conveyancing is actuallly exactly the same. You just need advice on what names to put on the contract and help with the stamp duty application after settlement.

My firm does SMSF conveyancing - we are solicitors too.

 

[Paul@PFI]

Sometimes in some states there can be duty concessions for transfer of a property into a SMSF. eg NSW.

There can be MASSIVE tax benefits in a "transfer" of a commercial property into a SMSF. With a potential of no CGT, low or no rate income tax.....

There are tons of ways to do this - SMSF loans, part sales, full sales, progressive transfers etc...All it takes is a phone call to someone who can advise. A personal engineered solution. The spruikers are too busy trying to sell people dud property.

One of the smartest smsf strategies is a self funded transfer. It a legit contribution cap buster scheme. No annual limits. And its not considered a tax sceme.

 

[Paul@PFI]

Thanks, Terry. What's your recommendation for conveyancing on a property purchase within a SMSF?

We have a lawyer who usually does our conveyancing. Should I look for someone more specialised?

Cheers.

My first advice would be to ensure its permitted. s66(3) doesnt allow a smsf member to acquire resi property from a member, a relative, an associate. EVER.

Its tragic when a person owns a property. Worth $500K. Their super has $800K and it is not allowed to buy the property. At all. All it takes is a plan. It can be done...

 

[Terry_w]

I am off to the full day SMSF Strategies seminar tomorrow in Sydney - anyone else going?

 

[Redwood]

I am off to the full day SMSF Strategies seminar tomorrow in Sydney - anyone else going?

You mean Grant's one? I took my team to the Melbourne event which was good. Some good contn stategies and I think you will enjoy the estate planning and family law discussion i.e SMSF will.

You might as well leave at lunch as after lunch its just cross promotions of sponsors
Enjoy the day.

 

[Terry_w]

You mean Grant's one? I took my team to the Melbourne event which was good. Some good contn stategies and I think you will enjoy the estate planning and family law discussion i.e SMSF will.

You might as well leave at lunch as after lunch its just cross promotions of sponsors
Enjoy the day.

That's it. Here right now and pretty good so far.

 

[Redwood]

That's it. Here right now and pretty good so far.

You will be dribbling with the family law stuff - note the SMSF will discussion, would be interested in your thoughts there

Enjoy the food as well

Cheers, Ivan