Investing in property with a self-managed super fund – is it right for you?

SMSF nest egg

In the face of a volatile world economy and shaky share markets, many Australians are looking for greater control over their superannuation. Combine this with the enduring appeal of bricks and mortar, and it’s not surprising that many are choosing to buy investment properties through self-managed super funds (SMSFs).

Is it the right strategy for you? Here are some of the ins and outs.

How does it work?

Since 2007, SMSFs have been able to invest in property and take on bank debt. There are some strict regulations around purchasing property within an SMSF, and you’ll find that loan conditions are different to the standard home loan. Most notably, the maximum loan-to-value ratio is generally lower, typically around 65 to 70 per cent of the property value.

What kind of property can you buy?

You can use a SMSF to buy a residential investment property that is rented out to tenants, but you can’t invest in the family home. SMSFs can also buy commercial properties such as business premises.

Just remember any property you buy with a SMSF must meet the fund’s key purpose of providing retirement benefits to its members. So what you’re looking for is a significant return through growth and rental income.

What are the pros and cons?

  • Tax benefits: There are considerable tax concessions available to SMSF property investors. When you hold a property in super, rental income will be taxed at a maximum of 15 per cent, and up to 10 per cent capital gains tax will apply if you sell after one year. Once you enter the pension phase, your property will be exempt from capital gains tax and income tax (from rental returns).
  • Control: Managing your own super investments can give you greater control over your financial future. Plus you have the flexibility to choose the type of property investment that best suits your needs and fits the SMSF’s investment strategy.
  • Costs: Granted, managing your own super means skipping the investment management fees. However, setting up an SMSF is costly and there are annual compliance fees to consider. Also, if you need to borrow funds to buy a property with your SMSF, you will be facing higher borrowing costs.
  • Responsibilities: SMSF trustees are required to meet specific regulations, especially when borrowing additional funds for property investment. Investors will also need to ensure their trust is set up correctly and meets trust and tax guidelines.

If you’re thinking about establishing an SMSF and investing in property, now’s a good time to get valuable advice on managing future investment properties. Contact property management experts K.G. Hurst today.

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