SMSF worthwhile at what $ point ?

Hi All, a while ago someone was talking to me about SMSF and property.

At what $ value would your super need to be, or what is practical, to start a SMSF to buy property.

 

It does depend on what the plan is with the SMSF - ie whether it's going to be invested just in equities, or if there is going to be gearing involved. If the latter the balance amount needed can be substantially less, as the effective gain through the use of leverage will outweigh the costs.

250k used to be bandied about (and still is to a degree) by many as the minimum amount for it to be efficient, but with the substantial drop in administration costs of a SMSF due to technology improving it's now possible to justify a SMSF at much lower amounts.

As a general rule of thumb, if you have a balance of 100-200k initially it's well considering as it will leave you with sufficient funds to commit to deposit, closing costs and buffer funds. The other contender at the same time is the lenders requirements who have minimum balance requirements, leftover funds etc.

 

Further to what @Corey Batt mentioned re balance guidelines, keep in mind a SMSF can have up to 4 members. For instance, a husband and wife may team up in a SMSF and combine their funds to reach a sufficient balance to be able to acquire a property.

 

Keep in mind this is financial advice mainly.

But from a legal perspective one reason to start a SMSF is for estate planning - control of member benefits on death. For these reasons it may be worthwhile considering even where the minimum balance level is not met at the moment.

 

There is no minimum balance. For financial advisors, if the balance is less than $200k and you recommend a SMSF then you need to clearly document the strategy and why < $200k is viable for the member including the running costs of the fund. There is no reason why this is not viable, especially if you are self employed - I did it and have no reason not to reccomend this to my clients and have my lawyers sign off on the SOA. Here are 7 reasons why ASICs interfering in the debate is BS http://www.supercentral.com.au/uploads/general/7 Reasons Why ASIC.pdf

Most online providers offer a no advice service where the key elements of why there are 1 million SMSF members as they have choice, control and flexibility to do what they want not what a regulator tells them to do with their super. For me, its all about strategy, no strategy no SMSF with my firm.

Therefore the answer to your question of what dollar value is appropriate is:

"IT DEPENDS"

How does that sound?

Its your choice, involve external parties and they will need to cover their butts naturally and no issue with that - as long as its in the best interests of the client.

For me, if you are self employed, a SMSF is a no brainer. Start thinking about it, develop a contributions strategy and stop paying rent. The majority of smsfs buying property are small business, unfortunately the bloody spruikers continue to get away with their ads saying "Perfect for SMSF".....

Cheers Ivan

 

Thanks @Redwood do you find that most of the SMSFs (self-employed) bought offices or commercial properties for them to run business in?

 

Hi Larry, I can speak for my client base, we have farms, offices, factories or developments, generally speaking any of these can be used for those that are self employed. Going back it has been used successfully for Doctors and Dentists and others caught on. And why not. Obviously my strong belief is that no one can mandate a minimum balance for this. An effective contributions strategy can take you from zero in super to glory in no time using the contribution caps. For new businesses it will be generally year 2 when they can consider buying a property due to cash flow issues and building the business.

Cheers Ivan

 

Thank you Ivan. The $200K or $250K minimum requirement myth buster is quite liberating especially now the costs of compliance is low compared to in the past.

 

It could work well for a small office situation

 

Yes indeed - Esuper have done this well. Y'all know my story, we are not online but operate a fixed fee service of $1188 admin, tax and audit. So if you have $100k in Super - thats 1.18% if $200k in super then 0.594% and so on.... fees are fixed. The research that ASIC based their conclusion on is old and outdated. Some Accountants can still charge $5k for this service, however consumers are smarter and shop around. Once they do - this makes a joke of ASICs mandate, paying higher fees does disadvantage the client and the normal aussie who is sick of poor returns with their employer sponsored fund, so let them go SMSF.....why not.....the amount of smsf's buying gold is ridiculous however not many AFSLs will allow you to recommend it.

Thanks again Larry

Cheers Ivan

 

How does it work from a serviceability perspective for a loan to purchase property within a SMSF?

e.g. say you had a $200k super balance and wanted to buy a $500k property. $150k deposit, $20k transaction costs leaving $30k in cash as a buffer. So you need a $350k loan... maybe your super contributions each year are only $10k, not enough to cover the interest, let alone P&I repayments. Do they take the properties rental income into account? Is it discounted at all?

 

The will look at the income of the fund and potential rent. Also income (and debts) of the guarantors.

 

The maximum loan a bank will offer to a SMSF for residential property is 80% of purchase price. Depending on the circumstances, perhaps less (eg if the location of the property is less desirable to the lender, or if the income of the members is low, or if the age of the members is closer to retirement age). As such the SMSF will need to fund a minimum deposit of 20%. Then of course stamp duty, conveyancing, building and pest etc.

The maximum lend against commercial property tends to be less than 80%.

Interest rates for SMSF loans tend to be a little higher than for property acquired outside super. Rent is taken into account as are member contributions.

A good mortgage broker could look at hypothetical figures and give a guide as to what a proposed SMSF might be able to do borrowings-wise post-setup. @Corey Batt , @Terry_w and @Redwood have each posted above and are brokers.

 

Make sure you get an SMSF loan with an offset and work it like crazy.

 

what he said!!!! ^^^^^^^^^^^^

 

Hi there BB -

Serviceability in SMSF is based on Contributions to your super fund. i.e 100k salary is $9500 in contributions, this is the golden trick with SMSF its not just income it is contributions - plus the rental income of the property. Remember, you have to prove to the lender that your current contributions will cover the loan repayments .... if not, they will ask questions.

Cheers Ivan

 

We are about to settle on a property we bought with our SMSF. We started it with 180k, property was bought 479k. We had to give 20% + stamp duty also have 10% left as a buffer as St George has this policy. It will be in an offset.

Rent + contributions cover the cost of the limited recourse loan + will have left over cash from contributions.

Our accountant charges $1650 a year to do the financials and organise the audit.

 

Hi Newbie - are you sure it was 20% - St George only provide a maximum LVR of 70% which will require 30% plus stamps...

Good scenario and hope it all works out for you.

Cheers Ivan

 

Last I heard, Bank of Melbourne (aka St George) were doing 80% lend on resi in super provided the fund balance was at least $150k. I could be recalling incorrectly...

 

Holding medical practice within SMSF is great. I can continue paying rent above (extra 10%) the market rate while using it as medical practice plus 9.5% contribution PAYG