A beginner's guide to buying property through your super
Hearing from people that they've used their superannuation money to buy a property might leave you feeling like you are missing out on some property market 'magic trick'. So, how does it work?
One of the growing ways people manage their superannuation is by moving their money from industry or retail superannuation funds that manage your investment for you into a self-managed super fund (SMSF) which provides freedom to control how retirement savings are invested.
This option is only for some as it can be an expensive, time-consuming and hands-on approach to managing your superannuation where the onus falls on you to ensure your investments comply with various superannuation and taxation laws.
How it works
SMSF lending allows you to combine your existing superannuation funds with a loan to purchase an investment property. This can be either a residential property (house or apartment) or commercial premises (e.g. warehouse or office space).
When planning what type of property to buy and whom you plan to rent it to, the ATO stipulates a strict checklist of conditions to determine if a particular property is suitable and whether the purchase transaction can be completed compliantly.
It is important to remember that your SMSF must fulfill the sole purpose test to be eligible for super fund tax concessions, meaning it cannot be used for any purpose besides providing a retirement benefit to the members. The ATO advises that there can be civil and criminal penalties if these conditions are not correctly applied.
SMSF lending
Not all lenders offer products suitable for SMSF lending, so professional assistance can help you find the right loan to meet your needs. Interest rates and application fees on SMSF loans can vary greatly and be higher when compared to other types of residential home loans.
The type of loan offered is called a limited recourse borrowing arrangement (LRBA). An LRBA protects the SMSF as a whole by safeguarding other assets held by the SMSF from the lender if the loan defaults.
Costs to consider
- Establishment costs - the initial costs of setting up all of the required legal entities, purchasing the property, and applying for a home loan can be expensive and need to be considered.
- Ongoing cash flow - you must have enough cash flowing into your SMSF to cover ongoing expenses like loan repayments and other property costs, including insurance, council rates and property management.
- Paying out the loan - once the home loan has been paid off in full (up to 30 years after the property purchase, depending on the loan term), the legal title of the property needs to be transferred out of the holding trust (known as a Bare Trust) and into the SMSF, which may result in government taxes like stamp duty being payable (again), as it is classified as a sale of the property.
Getting started
So, you understand how it works and have decided you would like to explore your options. The first step is to build a team to guide you through the process.
It would be best if you had some or all of the following:
- An accountant to crunch the numbers and ensure tax laws are considered;
- A financial planner to create a holistic investment strategy for your financial future. They'll take into consideration your overall financial needs and objectives;
- A legal professional to create the required legal entities and to navigate the legalities for you;
- A mortgage professional to guide you to the right SMSF lender's product for your needs. They are also invaluable team members in helping you to successfully complete the application process through to the settlement of your new property and beyond.
Once you have established your dream team, it's time to set up the required SMSF entities. Then you can crunch the numbers and apply for home loan pre-approval (so you know how much you can spend on a property). Then it's time to go shopping.
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