Pros and Cons of SMSF Property

Discover the advantages and disadvantages of an SMSF Property! In this short video, Ben & Bryce chat about the leverage and tax benefits, the limitations and some of the compliance requirements you need to think about before buying an SMSF Property.

Please note that while the video shares helpful information, it’s not telling you to invest in one. Buying a property in your SMSF is a very complicated financial investment and it does not suits everyone. Your situation is unique to others, so please get qualified and tailored professional advice before you make any investment decisions.

Now, let’s break down the pros & cons of SMSF Property. Enjoy watching!

Transcript:

What are the pros versus what are the cons of being able to buy inside a self-managed super fund?

Well, the first one is you can obviously use borrowed funds and that can help with accelerating the returns that you’re getting through the fund over time. It allows for a portion of diversification. So in most cases, any type of super fund will have a portion of cash shares, bonds, managed funds as their primary investment vehicles.

So this now introduces the ability to have direct residential property.

The other thing that I did mention before about the tax treatments is that you cannot guarantee that the government won’t continue to keep tweaking the tax legislation when it comes to super. But right now, if you’re thinking about entry level here, the attractions here are its tax rate on income and then it obviously includes rent.

A few cons to think about is negative gearing benefits are limited because the upside of that 15% tax rate is great when you move into income in there. But clearly the negative gearing phase is you’re not getting the same benefits as you would if you’re paying tax at a 40 plus percent tax rate. So there’s that.

You clearly got limited liquidity when you’ve got property versus other more liquid assets like shares. You can’t equity release if you want to renovate the property. You’ve got to have cash, you can’t borrow for those sorts of things. Interest rates are higher so basically you’re locked into a super environment and all those associated rules. So therefore there’s a bit of concentration risk.

As the trustee of the fund, you’re in total control. Total responsibility is on your shoulders. Now you can outsource some of the administrative work, but ultimately the fund and the decisions that are made in the fund are the responsibility of you as the trustee, and there are serious consequences and serious financial penalties if you are non-compliant inside your self-managed super fund.

You need to understand that there is a very cost heavy cost burden in terms of running your own fund.

This obviously includes all of the trusts and companies that you may be setting up, the holding trusts, etc. and then the annual tax auditing that goes on with that.

Compared to running a standalone individual property, this is very much more in terms of the administrative duties that are associated with that. And you’ve got to have a good accountant and you’ve got to have a good financial planner and you’ve got to be working in concert to basically get the best result for yourself.

Also, what we’ve observed is it can be a spruikers paradise as well because people use that as a way to get you to buy the wrong assets. It’s everything we’ve talked about on this podcast. The spruikers often have the right information from a strategic outlook, but it’s when they execute on the asset that it’s a let down. So that’s no different when you come into the super environment as well.

Putting on our buyer’s agent hat on here, the name on the contract is very important and quite often in a lot of cases, it’s state specific. So if you’ve gone through to set up the SMSF, you’ve gone through and you’ve created the Bare Trust, you’ve gone and got that limited recourse borrowing arrangement in place and everything’s ready to go. You will want to stay very close to your advisor and ask them specifically what needs to be included on the contract.

And it doesn’t necessarily cross borders as well because there’s different regimes.

If you get that wrong and then you go to the bank and you’ve got borrowing involved in some cases, you’ve got to go back and get the contract redone, which means voiding the one that you’ve got, updating with the new one, which if you’re in a fast paced market, that can be a challenge and in some cases in some states that may trigger additional stamp duty as well.

One final tip as well, what a lot of people don’t also realise in the establishment of the SMSF, you’ve got to have an outline and documented investment strategy in terms of what the fund is going to do. So if you’ve got no reference to direct property or is it in your book, then you’re in breach straightaway. If you then go off and think, I’m going to go and buy an investment property, but it’s not documented in terms of the investment strategy as clearly stated in the initial set up of the fund, you can’t actually do it.

We’re intentionally making you scared about this potential opportunity because you need to be advanced. You need to have that financial literacy and competency that we were talking about before before you entertain something like this, there is a hell of a lot that you need to think about when considering whether or not you would put property in a SMSF at headline level.

There’s a lot of amazing benefits from doing that, but it really always comes down to the same thing.

When you’re when you’re buying it in your own name and when you’re buying it in a super fund, it is the same game, just different rules.

You’ve got to understand the nuance of those different rules and how they apply to you and what you’re trying achieve in terms of the cashflow requirements that you’re trying to get in retirement that make all the difference here.

Same game, different rules, and those different rules is the reason why you need to get an adviser to help you with this.

If you don’t have an existing experienced and qualified Financial Planner on your team and would like to speak to one, we’d be happy to have a chat with you. Simply request a free initial consultation here, and our team will be in touch to provide the guidance you need to navigate these important financial decisions.