Hi all, I got approx 160K in my SMSF and would like to buy a house The big banks wont lend me as the fund is low. Wondering someone can suggest me a small lender who can service me a loan Regards
There are alternatives to the big banks that will have different lending requirements, suggest speaking to a good mortgage broker @Rolf Latham is very good with SMSF lending options
Timo There are a few steps involved, sounds like you have not signed a contract which is good. La Trobe is a lender to consider and there are a couple of others. Rates are more expensive than std investment loans. I suggest you get a pre-approval first and have a broker assess your contributions to determine if you can be eligible for a SMSF loan. The other factor is rental income. La Trobe will be fine given your balance, however you need to get a pre-approval before taking the big step to sign a contract. Hope that helps Cheers Ivan
$160k Is a low balance. From some one who has gone through process. Process was easy and my bank and account at the time set the structure uo within a few weeks. Issue being SMSF loans are expensive 6-7% per annum. Than 2500$ in yearly audits and accounting costs. With your low balance it's a.concern . Money may be better spent elsewhere. On a $400,000 purchase your fees and interest will eat the yield for breakfast
Depending on your purchase price we have our own wholesale product with no minimum fund balance or post settlement liquidity requirements. Rates from 5.69% variable. We are swamped with applications with smaller loan amounts ever since the majority of lenders pulled out. Happy to have my SMSF team send you over some product specs. Cheers Richard
I have done plenty SMSF purchases at 280-350 which included deposit amounts of under 120k which is probably about your limit given you will need to leave some buffer $ in the fund after the transaction. They are getting harder but still possible if you can find someone willing to let 70% or even better 80% if you can get it although this is rarer these days.
totally agree with ivan you need a written pre approval before house hunting - and be aware the smsf purchases slow the whole transaction down which changes how you negotiate. Need different terms of contract to make it all work properly.
I would start with financial advice to be honest as a SMSF is a financial product. A safely geared SMSF may still lack the liquidity buffer and in some cases poses a cash burden. There are many more factors to consider than just the ability of a SMSF to buy a property. The question is - Should a SMSF buy a property just because it can ? It could duplicate existing costs, provide no tangible benefit and also expose you to loss and risks. With SMSF setup costs, costs for the custodian trust structure and the annual funds costs + equity (depoit++) and the need to have all the transactions costs + a large cash buffer in the fund after that it doesnt leave a lot and is a VERY expensive exercise. The yield return on the rental will be negative. So it leaves the sole reason to undertake the exercise to the degree of the annual loss as a holding costs - For what expected future return ?? $160K wont buy much of a property at a responsible gearing level and if the interest pushes a fund to a tax loss there could be concerns regarding sustaining its bank balance and more. Lose a job and then the property could even become a forced sale. And the annual costs will be no different to those a fund with $1m would face.
Agreed re financial advice - All smsf's require a documented strategy anyway, so this is almost a mute point. For the record I didn't say they SHOULD invest in a property only that they COULD assuming they can still get finance in the current climate. When I have asked clients with smaller funds why they want to do this given the fees... the answers are usually some combo of "I prefer property to the sharemarket" plus "I can access some gearing which should see total returns improve over long term" plus "capital gains are the best money I have ever made and I believe the returns will be justified" plus "I believe rents will grow a lot over time and I trust that for my retirement better than dividends or other income generating products"
I was in a similar situation approx 12 months ago with the main difference being I setup a SMSF with a $230k initial balance. I used approx 50% of the funds to purchase a dual occupancy house in Dakabin using a 80% LVR at 5.35% interest rate. The property generates a net rental yield of 6%pa and I have depreciate schedule with 8k non cash deductions p/a. I used the other 50% to purchase equities and overall I am very happy with the way this worked out. I would strongly recommend anyone with over $200k setup their own SMSF.(assuming you have more sophistication than your typical fund manager).
Important to consider how overall asset allocation will align with your preferences and ancient wisdom of diversifying. Too much focus on a single asset class can bring things undone, especially if there is not enough liquidity.
This point is only correct “if” there is insufficient liquidity in the overall portfolio. I generally find (in my circle of friends and associates) that SMSF tend to have too much liquidity rather than not enough. The reason for excessive liquidity is that SMSF in the accumulation phase often get flooded with excess cash from member contributions, dividends, rental income, monthly distributions from investments in mortgage trusts ect. More often then not the complexity is how to re-position this excess cash into productive assets.
Yes that is often true in accumulation phase, vastly different story when it comes to pension phase. When income is not needed and contributions are still arriving, yes, often the cash allocation is overweight, and often property is overweight also. Seen multiple cases of retirees in pension phase run out of cash due to lumpy and inflexible assets, and it's most often come from lack of understanding on how to pre-plan for pension phase. The point is to be careful of the risks of being overweight in a single asset class (gross values). No advice
The lender liquidity requirements wil impose a minimum level of cash buffer at the time of acqusition of the property. Thereafter, the fund investment strategy should determine the extent of cash to retain. Poorly setup LRBA arrangements can mean the fund will burn cash from contributions and have a declining cash buffer which can be a problem. But for a fund that accumulates cash there can be high return alternatives for cash eg a offset account or a process of regular investment in other classes of assets. The recent ATO cautions and warnings about a predominant asset (usually property) in smsfs is something to consider. For the 2020 tax year these funds could face some audit pushback. That doesnt mean these funds are non-compliant. But if they have a poor or undefined strategy the auditor may report the concern. Still not a breach. Remember shares can be a cash equivalent asset. The ASIC rules on "cash" includes listed shares as these may be readily convertable (albeit with capital gain or loss factors) to cash with T+2 settlement. When compared to the cost of breaking a term deposit this can be similar liquidity. A fund investment strategy can and should consider convertibility to cash. In the CV19 era this can be a make or break to an investment strategy. eg a fund has a IS that says 15% cash and yet the auditor notes this isnt met. The CBA shares the fund holds may well still satisfy the liquidity test and the IS wont fail.
Ungeared UTs can be far cheaper but come with some limits and this wont suit people who have high gearing. For those that own ungeared property it can allow that equity to be used as security for a borrowing that can be split with a smsf. Loads of catches and traps but some real benefits too. And generally since the SMSF interest is ungeared it can use a strategy to change units progressively so the smsf acquires more and more interest in the property. Works as a good investment startegy for some.
Thanks @Paul@PFI . Really educational and inspiring Does the ungeared nature of smsf and UGT also allow development of property? Is the loan to buy units deductible ? What are the pits and falls ? Cheers Anchor
1. Perhaps. How will it be funded?... The ungeared position relates to the trust not the SMSF. The trust must remain ungeared and compliant. 2.Perhaps 3.yes. many
