Do you have property in your SMSF?

I hear so many people chat about how good this is, but not many people seem to have it.
Curious whether it has worked well for most people.

 

I haven't mainly because I'm happy with an Industry fund and like the diversification it provides outside of property

 

No.

 

Hi there - I have cast my vote as yes, I have a few properties in my SMSF one being a commercial property (office) that the SMSF owns and my company leases on commercial terms.

Buying property (using borrowing) requires an understanding of the risks and benefits and also a carefully developed strategy to invest in property and take advantage of the tax concessions available to SMSF. Key thing to remember is the property in an SMSF is for the sole purpose of benefiting your retirement, so its a long term decision not a get rich quick scheme.

Cheers Ivan

 

It's not good at all.

I'm totally against it.

Personal guarantees destroy your borrowing capacity.
You can't invest equity.
There are so many other downsides.

The only way I'd do it would be if I were 55 or wanted to buy my own business premises.

 

I was going to set up SMSF soonish and was planning to borrow through the fund to buy property. From memory my accountant told me it would have no effect on my personal borrowing capacity. Is there ways around the personal guarantees?

Cheers,
Clint.

 

You've mentioned the most important tenet of investment hugh - diversification.

Unless you have adequate resources accessible within super, purchasing more property only provides exposure to a limited class of assets. Should government policy ever change regarding ownership of real estate where would your portfolios be if you only hold property?

 

That is why you shouldn't take advice from someone who is not licenced. This is not the case.

 

I'm not an expert, but every super loan product I've seen has these features.
1. Requires personal guarantee (which must be disclosed as liability on all loan applications outside super)
2. Higher interest rate
3. Poor LVR and limited leverage

Then once the property appreciates you cannot buy more because no equity release is not allowed. Better to buy it in your own name.

Other bad features are no negative gearing tax benefits, and complicated PITA structure requiring multiple trusts and trustees, 1 per property.

Normally need voluntary contributions to make it work too, not good for cashflow.

Personally I think people are better to keep their voluntary contributions. Buying properties at 88% LVR you will buy almost twice as much as the 60 or 70 LVR from super. Plus the tax advantages will raise your cashflow allowing you to buy more. A person who does this has the potential to retire in half the time if they work at it.

 

I think you mean no negative gearing against personal income, but a SMSF can negative gear like any other entity. If the property produces a tax loss then this loss can be used to offset other income of the fund - such as employer contributions and this could save the 15% tax on those.

Also a fund can indirectly allow negative gearing outside super. Say there was a $10k loss from the property, the member could salary sacrifice $10k into super to offset the loan and reduce their income outside of super by $10k saving say 47% tax

 

Thanks Terry I forgot about that.

Personally I think it's the long way round and unnecessary complexity, when one can buy property outside super instead.

 

Dan - not necessarily.

Imagine you had $200k in super. You could buy a $300k property using 20% deposit plus costs - around $80k. The fund would still have $120k to invest in other areas. You could park this in the 100% offset where employer contributions would be deposited too. Then invest in shares perhaps. The property would quickly become positively geared but with depreciation there may be a tax loss which will save the fund tax on your contributions.

15 year IO loan and after a few years the fund would have another deposit saved up - could repeat. After 30 years the property would be paid off, probably would be much sooner. Tax free income would then be received, or maybe sooner.

I guess the main point is only using part of your super you could cause the superfund to leverage into property rather than buying direct shares. Shares on average outperform property, but with leverage property could do better, especially over the long 10+ years.

Outside lenders may not be too concerned about taking into account a contingent guarantee on a property paying it own way.

 

No.

I think akin to Hugh.

My regular income should set me up.

Property is my go big for the kids play. Ill diversify into other asset classes when I get up and running.

Super is my backup in case all fails, and I'm not meddling with it.

 

That seems to be the best way to make use of SMSF. Anything else seems a little not worth the hassle.

 

What part of interest only pays off the principal?

 

A CIP yielding 9% with a loan IO at 5.5% and tenant paying all outgoings, the cash surplus pays the loan principal

 

Yes I have two props, three income streams and a significant share portfolio with an additional income steam. Offset account reduces risk and loans will be paid off rapidly.

Has not affected my borrowing capacity

 

When you apply for loans do you declare your super loans as liabilities?
How can it not affect your borrowing capacity? Did they let you borrow in super without a personal guarantee?

 

After 30 years we should all already be mega multi-millionaires from our property investing we've done outside of super
Not many people with 30 years to go until retirement can say they have $200k in super to invest - Most people buying in super would be needing additional contributions, which would be better spent on property outside super.
Instead I prefer just direct equities, keep it simple, and it diversifies what we all have at PropertyChat - a very LONG residential property portfolio on the outside of super.

I don't think the leverage is enough, 70% in super you can do alot better outside super using LMI at 90% and buy double the amount of property. At the same time, the meagre amount our employers contribute can go into equities to balance our overall portfolio

Commercial property is the only way I'd buy property in super.
The leverage is the same both inside and outside of super, and the cashflow is positive.

Often I go for loans, they look at my SMSF trustee directorship and ask for letter from an accountant stating that the company is trading profitably and it has "no debts". It's obviously a trustee only company, but some lenders are just a pain...

Curious to learn though - how would lenders not be concerned? I know one could "forget" to mention it, but this is not the best way to do things..
Happy to be educated, maybe I can do things better and push the boundaries more

 

I have never had a client who didn't service because of a SMSF loan, but like a discretionary trust the lender can take into account the rental income of the trust when determining serviceability.