SMSF property portfolio strategy

Discussion in 'Investment Strategy' started by 4nextGen, 19th Jan, 2022.

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  1. 4nextGen

    4nextGen New Member

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    Hi
    Just wondering to run past our strategy with the wider community..
    We are in late 30s with 300k in SMF
    Goal
    Aim to achieve passive income of 80,000 (after tax ) in todays's value from SMSF at age 60
    Known Over head
    SMSF cost of operation
    interest around 4% ATM
    20 %LVR
    10 % liquidity

    My strategy:
    Property 1:
    Buy property with positive cash flow within SMSF around 650k in QLD with positive cash flow between 5k to 6k per year. Paying P+I costing me out of pocket 12k per year which mean i have to contribute to SMSF at least 12k .
    Property if fully paid will give me around 38k per year

    Then use the cash flow to buy another property in SMSF ( since i cannot leverage the equity in SMSF property ) only way to build a portfolio is having cash flow property and may be another property in SMF for Capital growth

    Property 2 --down the line ???
    Buy another property aiming for Capital Gains which will be negatively geared around 6k per year, so my portfolio is will be close to neutral geared. Paying down the debt in 2 properties inside SMSF will be saving some tax (15% compared to 30 ish %)

    At the time of retirement either hopefully paying off debt OR sell one of the Property use the proceeding to buy cash flow assets

    I am looking for some comment around moving from Property 1 --> Property 2 I am not sure if i can do it even with this cash flow Have you done this is there any other things i am missing out.

    Thanks ALL Greatly appreciate your view and comments
     
  2. Redjane

    Redjane Active Member

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    did you end up doing this?

    I’m planning to do the same but buy 2 to 3 300k properties with high yield in smsf.

    Will hold and live off rent on retirement in 30 years so 3 properties should give us $50k per year for living expenses on top of our other portfolio in our name. we only need $50k for our living expenses on retirement, no plans to travel or anything like that, just a simple life so $50k is kore than enough. the rest of rental income will be for the kids future making sure they will have something to fall back on.

    then will have the kids inherent and continue for them to use the rental income or for them to expand and buy more.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Do you think that is a good strategy? How would it compare to just having the super fund invest in ETFs?
     
  4. Redjane

    Redjane Active Member

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    Just have a thought about this strategy in the past week and lately has confirmed my decision.

    I guess we can say i can get the same yield with shares for a $1m portfolio but I'm not comfortable with the volatility. At least with rental property it will only stay the same or increase year on year.

    Thinking to buy units in blue chip areas where migrants sought after for good schools so vacancy will be at the minimum.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    think about the liquidity too - a sudden death of a member may necessitate a quick sale
    And the transaction costs. These are generally high with property, but higher still with a SMSF borrowing
     
  6. Redjane

    Redjane Active Member

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    still reading regarding smsf structure but i thought if you set it up in a bare trust or company will be easier with estate planning, in case death of a member? is that right?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not really. The members benefits must still be paid out as soon as practical after the death. If the fund has cash or other assets this may be enough to make the payment and the property can remain as is, but over time as values increase and member balances increase this might mean a sale is necessary.
    No one plans on dying, but it happens to 95% of people at some stage
     
  8. Redjane

    Redjane Active Member

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    I agree that dying could happen at any time.

    Is there a way for this to be handed over to the children then? Or it can be structure later on or needs to be done from the initial setup?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The dead persons benefits must first come out. But now SMSFs can have 6 members so it might be possible for someone else to become a member and the case they inject into the SMSF be used to pay out the member benefits of the dead member.
     
  10. Never giveup

    Never giveup Well-Known Member

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    Lets say 2 member fund and no dependents and one dies whats the point of paying bebefits when there is no one else as these 2 members are husband and wife?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Its the law.
     
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  12. Never giveup

    Never giveup Well-Known Member

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    So wife will get husband benefits if he passed away and vice versa as both are directors of the comp/smsf
     
  13. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The death benefits "cashing rule" is a key element of a SMSF decision and yet so many SMSF members have (should have) signed a Product Disclosure Statement and a trustee declaration which both explain this. A particularly fatal assumption is that what is in super is "mine". and just goes to a spouse.

    Just because spouses are married or defactos certainly does not mean that super reverts to the spouse.
    Death benefit nominations;
    reversionary pensions;
    Wills;
    Executor choices;
    may all affect this. There may be very sound reasons and strategies to NOT pay death benefits to a spouse. It may be extensively exposed to bankruptcy, spendthrift habits, gambling drug and alcohol problems, claims by creditors or bypass children etc.

    There can also be mistakes when some of the above strategies are considered and they are defective or not safeguarded too.

    When a smsh is established its generally well advised to visit the estate planning issues with a solicitor that embraces the fund and other super, insurances and wills. For example a testamentary will may safeguard death benefits from creditors.
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No.

    There is no compulsion for the spouse to benefit and being a director is not directly relevant.

    The member can decide who gets their super. They can force the trustee to pay their estate and then they could leave it via their will to Putin if they wanted to.

    Being a director of the trustee means they might be able to control who gets the super in the absence of a valid BDBN.
     
  15. nextPhase

    nextPhase New Member

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    Sorry lost my older login it is my post.

    Just got an IP in QLD 660K with rent 770 per week in SMSF. Interest rate is 4% !! it is positive cash flow ATM. I would be forking around max 6-7 K per year from my pocket to pay the Principle.

    +ive cash is taxed at 15% which can be further reduced by depreciation. We are planning to pay this house in 20 years .

    I was advised that to get 2nd property in SMSF I need to gather some deposit and Banks are tightening the borrowing capacity in SMSF significantly.

    SMSF is hell a lot complicated at least for me so i get help from my lawyers to build the scaffolding required.
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    why are you paying the loan of a SMSF?

    Why do you need to gather a deposit if the fund willl hold the property?
     
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  17. nextPhase

    nextPhase New Member

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    I don't have an option to choose interest only SMSF loan. Also if i pay the principal it's only taxed at 15%. Technically i can pay off the SMSF house sooner compared to my PPOR

    I need to save up for 2nd IP in SMF and the cost => 20% down payment + Stamp duty + 10 % liquidity in SMSF
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    There are a lot of tax and legal issues if you are paying a SMSF fund loan. What you would need to do is to make a contribution, perhaps, and it pays it own loan.

    The SMSF needs to save up for its next loan. It might do that with the help of extra contributions from its members.

    A trust is not a separate legal entity to the trust but it is highly regulated and is a separate tax entity to you.
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Actually if the extra contribution (that is what paying that part of the loan is See TR 2010/1) it can be a solid strategy provided caps are OK. Basically the member then gets a contribution tax deduction at their marginal rate in exchange for the contribution being taxed at 15%. Any contribution over cap can be made as non-concessional so no deduction but no tax in the fund either. Preservation must be considered. It can be a solid strategy to build equity. Unlike other investment loans you cant pull equity from smsf loans so way to pay down the loan faster can really assist to build cash.

    My tip - if its possible is a smsf loan with a offset since any cash can save 4% interest. As Terry says a SMSF must build suitable funds for the next and that may be 30% or a bit more for a second property as deposit, duty etc and then costs for new bare trust (use the same custodian trustee company to save). And lenders tend to also mark down existing and planned rental on servicing since they want to ensure if property is vacant there is a plan. IF there is a ability to consider further members this can also assist. However it does come with issues that are best given LEGAL advice as there can be restrictions and even concerns. Each member must have equality in decisions etc and you cant just disregard a minor member. But adding a new member like a brother could be a way to access more funds through their rollover and their contributions. But you will be "tied at the hip"
     
  20. nextPhase

    nextPhase New Member

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    Thanks Paul and Terry

    Yeah, trying to max out our concession contribution every year kinda big challenge for us.

    Made a choice in setting up the trust as individual trustee rather than company trustee, hence adding new member is very difficult . In my situation i won't be adding any new member for a long time .

    Not sure how do we hit a cap in SMSF borrowing if properties in SMSF are +ive CF?