Over the past few years, buying property with super has been very popular, isn’t it? And the explanations go much beyond the fact that it could be a little fashionable. The key advantage of buying property with super is that it is a different way to invest in real estate that doesn’t significantly affect your finances or ability to borrow money in the future. This means it’s almost like having an extra property in your portfolio that you would not have been able to purchase without using your superannuation to fund it!
Here are some points you need to know before investing
Kind of asset
Are you planning to purchase a brand-new home or an existing one? Many individuals advocate for the purchasing of brand-new homes in super. Agents and experts that receive significant commissions from real estate developers or the developers themselves generally drive this.
Per sold home, commissions might range from $10,000 to $40,000. Anyone collecting a commission might not have your best interests in mind; instead, they’re probably just looking to sell a few (thousand) more pieces of real estate. Who do you suppose is ultimately responsible for paying the commission, too? If you’re unsure, take a glance at yourself in the mirror to find out. You will most likely pay an exorbitant sum for the property.
Established properties are actually more likely than new ones to provide better returns. When you take a new automobile out of the dealership, what happens to its value? With new properties, nothing has changed. They get dull and decrease in value over time as a result.
Structure of loans to SMSF
There is “little recourse” for the loans. This means that if your SMSF is unable to make the payments, the bank may take possession of the property but cannot seize any of your fund’s other assets. The ownership of the property is affected under a different legal framework known as a bare trust. As a consequence, there are now four legal entities: the SMSF, the bare trust, the trustee of the bare trust, and the SMSF trustee.
There are one or more trustees for each super fund. The trustee(s) may be a firm or an individual, and while an individual trustee structure is somewhat less expensive, that is the extent of its advantages. It is typically advised to use a corporation as a trustee, especially when considering buying real estate, as banks are far more inclined to lend to company trustee arrangements and will do so in more favourable conditions. A business form has additional definite advantages, such as reduced liability and a lighter administrative cost when adding members or withdrawing them from the fund.
Creating accurate documentation
For loans to SMSFs, proper paperwork is crucial. If you make a mistake, the ATO will demand that you undo the transaction, which often entails selling the house. Stamp duty, commissions, legal costs, and other expenses will run your tens of thousands of dollars. Take no chances!
The best approach to ensure that you do this correctly is to engage with an SMSF provider who has experience negotiating property transactions inside of super. General accountants frequently get this incorrect, putting the four entities in the wrong order and the inappropriate names on different papers. You serve as their test subject because many of them have never done this before.
As you can see, buying property with super does have many potential financial advantages, but it may also be more difficult. For this reason, it’s crucial to get expert counsel from a licensed financial planner before making this decision.