Ins and outs of SMSF IP

This is what I was eluding to with liquidity of the asset. @kierank you have given an example with the use of 1 property with a lot of costs excluded and needing to find 7,000 p.a. if you had 4 of these properties then you would need to find $28,000 a year which would really eat into any cash reserves you did have and selling a whole house just to get access to $20,000 is not smart use of money in my eyes.

RE diversification at $5,000 shares give you a much easier way of doing it, 1,000 in mining shares, $1,000 in property shares, $1,000 in retail share, $1,000 in bank shares and $1,000 in cash.

You can even 100x it comparing to 1x $500,0000 house (all property).

@JacM, how do you address the drawing down the equity part?

 

Check out this thread:
CGT in a SMSF . When dose it stop ?
Cliff talks about his SMSF having 4 properties and selling one,

 

@Big Will

You cannot draw down on equity of a SMSF property. The closest thing available to doing so is selling the asset. I don't intend to sell mine ever but that's always the option.

 

Personally, I think anything less than $200k in SMSF is a waste of the resources in there.

Buying a resi property with every last cent (save for a measly $3k emergency)....meh. That's high risk unhedging a single asset under speculating circumstances. And the #1 reason for many for doing this? So they can say they have x number of properties. Using SMSF monies is just access to another deposit they otherwise don't have access to outside superannuation, when they just have the itch to purchase.

Use high leverage, LMI funding for resi properties outside Superannuation for growth.

Leave the low LVR, income generating assets for Superannuation (CIP, Equities), and PAY THEM DOWN. Having unencumbered assets only in SMSF when you reach pension phase is the only way to go, otherwise you will be required to start selling assets as alluded to above.

Also, no one makes mention of having life insurance and TPD insurance they otherwise would have had in their industry fund. This should be also accounted for, and a cost which isn't light if you're only generating neutral cashflow with a resi.

pinkboy

 

I'll add to the conversation that I am not keen on the concept of buying property that fetches a really low rent in a SMSF. This is because of the costs of entering into the loan. (Setup of security custodian and deed, bank fees to read deeds etc). I personally wouldn't like to purchase something in a SMSF that fetches less than around $275 per week in rent. It would be more sensible for the SMSF to wait until it can acquire an asset that produces an annual rent that makes up for a decent chunk of income needs in retirement. I shudder when I hear of people planning to acquire property for say $110k that will only fetch $150 per week in rent.

Also the bank offerings are structured in a manner that the loan would be repaid by retirement age.

 

@JacM Good luck with your strategy, I hope you have looked at all the alterntaives and like what @pinkboy has mentioned it wasn't to add another property to the claim to fame.

For me SMSF is a great avenue to invest in shares and using your own name (or trusts) is a great avenue for property. This will lead to a well rounded diversified portfolio that gives you flexibility when reaching pension phase plus pay for additional expenses (insurance, account fees etc) and the ability to leverage and draw equity from properties when able to.

However I would still not recommend to people to use SMSF to purchase a property (except commercial for themselves).

 

cant agree. Property done at lower price points and with NRAS credits, will not only self fund, but also pay themselves off and expand an SMSF's footprint much more effectively than shares are likely to - unless you can get 70% gearing over 30 years for shares, and generate 8-9% fully franked dividends PLUS growth. Possible I guess... but those sorts of results are absolute best case for a share portfolio. For NRAS property in SMSF, thats kinda worst case... 8-9% fully franked dividends I mean... the upside could be far greater as thats what a 400K property would yield. 300K would be 11-12%. And if you employ offsets, it's potent because you can still effectively run a dividend reinvestment strategy and not lose the ability to keep harvesting equity and going again...

In any event ..the maths tell the story, and NRAS tax free kung fu is at least as strong as, and likely quite a bit stronger than , other fully franked kung fu.

No claim to fame involved,... simply a case of taking X amount of dollars and tripling or quadrupling it within 15 years while paying the debt off and retaining all the income...

 

Wouldn't you just sell the property at retirement anyway, whether it's in or out of super, to fund your retirement? Yes you could pull out equity and buy another, but at some point wouldn't you just sell the property and enjoy the equity? Personally I plan to sell all of our properties, the ones that are paid off first to live off the equity, whilst the others are being paid down in the background. I realise that some people will just leave them to children/family and not sell, just live off rent.

 

Not me. I have more than enough in Super to fund our retirement. We have never lived the high life and too hard to change now - more than enough in Super to fund our lifestyle.

Not me. Don't want to pay the REA commission, the legal fees, the CGT, ...

That is me. Our IPs are in trusts. When they expire in about 70 years time, my grandkids will be in their 60's and 70's. They can have all the headaches of selling, paying REA commission, paying the legal fees, paying the CGT, ... If they object to this while I am alive, I will just remove them from the list of beneficiaries .

Or maybe, they will be able to extend the trusts so they can avoid 'all of this pain' ...

 

I was just curious, and your reply is fits what I was thinking. We also don 't live the high life, but buy mainly cf+ properties, pay them off and live off increasing rent. If you're finding there's so little left after buying, selling and holding costs that it's not worth selling after years of holding ips, then I'm happy following a different strategy. There's no right or wrong way, but this just confirms to me that I'm on the right lines for me Thanks for the info.

 

No need to sell if they are paid down. They will be generating a passive income, and in fact will allow for far greater expansion.

Let me give you an example of an NRAS property I am selling right now and how it would work in a SMSF.

Purchase Price 355K. Rent $340 per week . NRAS rent $272 per week - 14.1K per annum.

The SMSF would need to contribute @115-120K to fund a 30% deposit + stamp duty.
The SMSF would therefore borrow 248.5K via a LRBA
The SMSF would generate @ 8-8.5K CF+ per annum after all costs and deductions and NRAS credits were accounted for.

That surplus amount , plus a member contribution of 9.5K ( based on 100K salary) paid into the offset account, would pay down the debt in @ 14 years.

For a 2 member fund with 200K salary income, the member contributions of 19K + the 8-8.5K NRAS surplus would see the 248.5K mortgage paid down in @ 11 years...

Pretty powerful stuff.

Which leads to the passive income result ... If market rent is $400 today, after NRAS ceases in 10 years and the property returns to normal market rent, its reasonable to expect that the rents would be at least 50% higher than today ( $600 per week - 31.2K per annum ) and within 13 or 14 years could conceivably even have doubled to $800 per week (41.6K per annum)


After deduction running costs , that asset should be producing between a net of 25-35K of income to the SMSF. Combined with ongoing member contributions of 9.5% of salary, that starts to become a fairly significant amount of money flowing to the SMSF annually... even more so if additional concessional contributions are being pumped in.....

Now imagine what 2 of these NRAS could do if you had 230K that could be deployed....

Both properties would be paid off within 11-14 years. Net result would be 50-70K passive income from 230K invested + member contributions. Thats a 21-30% return on the 230K! With all of that money coming into the fund, that's more than enough to leverage into a 3rd investment property (non NRAS) at 70% LVR and pay it off in double quick time using the 3 rental incomes plus the member contributions. Pretty soon you'd have 3 rental incomes and no debt. compound upon compound... and you can extrapolate this as many times as time and budget and appetite allow...

The point is; 20-25 years from now, just as you are looking for cash flow for retirement , rents on that $400 per week property that the SMSF initially put 115K towards, may be anywhere between $1000 -1200 -1500 per week .... so you can do the maths if you owned 2 or 3 of them outright within the SMSF .... NRAS will facilitate this because it essentially provides additional cash flow that is the equivilent of another member on 100K salary. It lets you pay off the property in half the time, so you can recycle the equity into additional purchases. The simple mathematical argument is what it is- numbers never lie. You cant beat these returns or multipliers. You just cant. It's tax free money for jam, which will make you tax free (for now at least) money for retirement

 

Thanks, I'll need to read through that and digest it properly. We worked remote and paid off about 400k ip debt over 4 years (properties returning 10-11% yield). Also have others on P&I in the background and some paid off so already achieved what you're suggesting, and quicker. I get what you're saying though. One of my main concerns would be the unknowns of government policy in future years that can, and has upset what seemed like fool proof plans. Plus not sure whether to just be happy with what we have. I'll be back when I've read through this post more fully

 

My recent CIP walks all over this.

PP: $850,000
Deposit: $255,000
SD, Loan costs, Legal: $55,000
Interest rate: 6.3%
Income: $93,500 (tenant pays ALL outgoings) and (3% annual increases). (Under market rate according to val)
2x member contributions ($80,000 each): $15,200

Property effectively paid off in 7 years.


The income from this 1 CIP still exceeds 3 NRAS properties ($345,000 deposit and costs, similar to my deposit for comparison) income which will still take 11-14 years to pay off. My SMSF will generate almost $400,000 extra cash (on 11 year pay off assumption....and much more if it was 14 years) before the NRAS properties were fully paid off - which is another solid CIP or 2 deposit to compound the returns.

Your focus is too narrow.

pinkboy

 

As noted in the thread linked by terry , we have four IP's in our super .

Originally the intention was to keep all four and pay them down by making additional non concessional contributions .

By selling one we can accelerate the process of paying the others down and generating income a lot earlier than we otherwise would have . We'll also be able to start diversifying the fund . Because we put a reasonable amount of equity into our initial purchase and have had good capital growth we will be able to pay one of the other properties down completely and make significant inroads into paying another off .

One of the remaining properties has an offset so we can park the money in there

We can go into pension phase to avoid paying CGT and subsequentally go back into accumulation phase if we want to .

We're probably going to stay in pension phase to increase cashflow

After the linked thread , we've had a meeting with our accountant ( who appears to be well on top of managing SMSF's ) .

It is a complicated area though it is worthwhile spending some time understanding what can and can't be done .

Our accountant stressed the importance of making sure that you do have the funds to make the necessary distributions each year .

Cliff

 

Actually the modelling I provided didn't cater for NRAS indexing. The pay off time was modeled on there being zero increase to the NRAS credits over 10 years. I always model worst case. No growth. No increases to the NRAS etc... just to see how the pure worst case cash flow works, without any "assumptions"

But OK, lets use 3% like you have . With 3% indexing factored in, the 8.5K in Year becomes more in Year 2, more in Year 3, more in Year 4 etc... so "assuming" 3% is achieved, the surplus cash flow allows the time to pay down the debt fall to 8 years. Pretty much the same result as you have outlined, but with the flexibility of the asset base being 3 stand alone dwellings rather than one, which could be sold independent of each other... ie not all the eggs are in a 1 property basket.

Your approach also only accommodates those with 310K or more in Super. It would prohibit those with smaller balances from any access or participation.

And how does your modeling withstand prolonged periods of vacancy? NRAS allows for 91 days ( 13 weeks) of vacancy before there is any impact at all on the NRAS credit.

How does the property you have proposed, do with 13 weeks (25%) of its cash flow taken away? Thats a pretty substantial contingency to consider

So I'm not sure about a walk over , nor a narrow focus... I think when considered properly, it's a strategy that fits a far broader range of SMSF's than what you are suggesting, and it's a strategy that retains a far great level of flexibility and safety than what you are suggesting, and it's a strategy that can cater for rental contingencies far better than what you are suggesting.

That 6.3% interest rate could do with being a little narrower though

 

I didn't even include the 3% Income increase in my calculation either. I just put it there because it was part of the lease and information from my earlier thread.

The difference in the income and the 3% increase with the CIP is that the increase is GUARANTEED under the lease. So there is no assumption for future income.

Without calculating, the CIP in theory would probably be paid of in 5 years. (Also see interest rate below).

I only used my large deposit scenario against your scenario because you then assumed if people had $230k in super they could buy 2, thus having them being paid off in the 11-14 year range. I used 3 to show similar deposit scenarios.

Because my CIP is occupied on a 10x10 year lease by my company, there is no worry or contingency required to the model on this particular scenario. Perhaps if you were to be purchasing stand alone CIP with residing tenants than you might apply a contingency. But given there is a lease in place, or you buy vacant and draw your own lease up, there is rental guarantee for decent set periods of income (years and options), a luxury not given to resi.

Regarding rate, rate falls .2% each as the LVR falls to 65%, 60%, 55%, 50% to 5.5%. It's not unreasonable to expect higher rates for commercial and also location comes into play. I would expect metro CIP to attract rates around the 5% mark.

pinkboy

 

Notwithstanding any of that pinkboy, you still require a 310K seed to do that deal... puts it out of reach for many.

Commercial just isnt going to practical for many

 

Notwithstanding any of the low entry options you put forward, there is still large outlays annually not accounted for which hurt a low entry model.

What happens to your model when 2-4 members require Life and TPD insurance premiums which will be in the $1,000s per annum? These are 1-3%ers for large assets in SMSF such as mine or similar suggested. These costs will bite into the income 10% plus per member requirement on the low entry model, taking up valuable income to pay the properties down. This will increase your pay off period.

Then you have also several sets of trusts to administer which add up vs. 1 large asset. More costs = less income deployed to pay down assets.

Yes large deposits are out of reach of many, but the combination of 2-4 members who create a SMSF at arbitrary age of 35 (10-15 years in workforce) will be significant enough for a decent CIP purchase, with all the perks of a decent lease, without worrying about possible tenant churn every 6-12 months 3x properties over.

pinkboy

 

I personally retained a small balance in a retail fund where those insurances remain in place - they have zero impact on the SMSF's cash flow.

This is a good debate though. Demonstrates that depending on the size/capacity of the SMSF, commercial should obviously be looked at very seriously. But also demonstrates that very similar results can be achieved for SMSF's with smaller asset bases , using a resi/NRAS approach.

 

Hmmm, just wondering aloud, no one has mentioned what happens when the rent from the IP or CIP doesn't come in for months if the IP/CIP stays empty for whatever reason.
Does it drain the super, do you have to keep being a slave to work to feed the mortgage on the loan to your super fund?
For this reason, I kept my super investing in IP simple and pretty 'stupid'.
Bought the whole bloody IP for 300k, placed it entirely in the super, so that if rent doesn't come in for whatever reason, I don't have to spend sleepless nights.
Still have 100k leftover in the super, I plan to build a granny flat on the property to increase the income from rent
Then maybe invest in some gold maybe????
Or put small punts on some small caps? Art?