SMSF Lending 101: Unlocking the Additional Equity
One of the most powerful options you can utilize if you have a Self Managed Superannuation Fund (SMSF) is to leverage and borrow into property. Unfortunately, many individuals either do not know about self-managed super funds or they simply do not understand the concept because it can seem at first to be quite complicated. However, those who take the time to learn about this option typically find out that it is actually quite simple – especially when explained by a qualified and licensed Financial Planner or Accountant, in conjunction with the right financial and property advisory firm.
Although self-managed super funds are quite valuable for some people, it is important to note that they may not be ideal for everyone. If you are considering this investment vehicle, you should carefully consider whether or not this financial tool will help you in your particular situation. Here are a few things you should know about SMSF so that you can make an educated decision about whether or not an SMSF is right for you.
How Does It Work?
Some people want more hands-on control when it comes to their property investing choices, and an SMSF gives them that control. Typically, individuals who have some experience and skills in both legal and financial matters are able to handle SMSF on their own, but most people rely on a professional financial specialist to help them make the wisest decisions regarding property investing. Opening an SMSF and relying on an SMSF specialist to help manage it still gives the fund owner more control over their investing decisions than they would have with many other investment options. The ability to have a say in the management and decisions regarding one’s superannuation is what draws many people to this form of investing and lending.
In Australia, there are very strict rules that the Australian Taxation Office applies to self-managed super funds, which is one reason why many people choose to enlist the help of a specialised service to help them navigate regulations. Anyone who wants to refinance an existing property or purchase a new property as part of their SMSF is encouraged to speak to a licensed Mortgage Broker to help them with this process.
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Benefits of SMSF Loans
There are many benefits associated with self-managed funds for property investment, which is why it is becoming such a popular option for individuals who want to strengthen their financial position. People like the fact that they can leverage their investment in direct property by borrowing upwards of 80 percent of their property is value. Additionally, costs for these types of loans have dropped as more competition enters the market and they offer the potential for strong rental returns. If property is purchased through SMSF lending and held onto through retirement, the buyer does not have to pay tax on rent or capital gains once the super fund is within the pension phase. This is a great benefit for many individuals who want to continue holding onto their investment or sell it after they retire without facing horrendous taxes.
Yet another benefit of super funds is that the rent and capital gains are only taxed at 15 percent prior to retirement. Once the property has been held for longer than one year, capital gains are only taxed at 10 percent. Finally, many people choose to manage their own funds because they enjoy the direct control they have over their investments. Even with the help of a knowledgeable SMSF specialist, the trustees of the funds still has ultimate responsibility for the fund and where and how their money is invested. Having this type of diversification in an investment portfolio is an invaluable asset for many people, as long as they have a good understanding of how super funds work and should be managed.
As mentioned before, a super fund is not an ideal option for everyone, especially if they do not have any legal or financial background and do not rely on expert advice in their investment decisions. One of the greatest potential drawbacks of managing a super fund is that there are many different and various level of compliance that must be followed. It is an extremely regulated industry and if the super fund owner does not understand and carefully follow applicable regulations, they could find themselves in a lot of trouble financially. Additionally, the property purchased through SMSF lending cannot be lived in by a related party of the super fund owner.
It is also important to note that the property cannot be renovated if it is still under loan (although improvements and maintenance may be allowed). Due to the many different regulations associated with lending through an SMSF, it is very important to consult with a professional financial and SMSF service to ensure that you do not break any rules unknowingly.
As long as you are aware of the potential drawbacks associated with super fund management and know how to avoid them with the help of a professional advice, your chances of experiencing success with self-managed super funds lending increases substantially.
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Success Is All About Who You Talk to
There is no quicker way to mess up your financial situation than to entrust your SMSF with someone who does not know what they are talking about. We can’t emphasize this enough but speaking with a highly-trained SMSF specialist is essential if you want to fully understand your options and ensure that your super and your lending is set up correctly. The right professionals can also help you understand your current financial situation and how self-managed super funds can either help you or hinder you. There is a lot of information circulating about these types of lending options, so again make sure you trust an SMSF specialist to help you understand the positive and negative aspects of this property investing option before you decide if it is the right path for you to pursue.
The Best Time to Participate
Generally speaking, the most appropriate time to participate is when you have adequate funds in super to make setting up an SMSF worthwhile considering the cost of establishing and running the fund. Investing in property inside the fund is sensible when you have good cashflow inside the fund to buy and borrow for the purchase. This option is especially appealing for individuals who are within 20-25 years from retirement age, simply because they typically have a greater amount of super money available for investing and are more likely to enjoy the tax saving benefits that come from holding onto the investment property until after they retire. To start experiencing the benefits of SMSF lending, talk to a trusted SMSF specialist today.