Using Super to Invest

Hi Kalkat,

I think Richard hit the nail on the head.

You time and money would be better spent educating yourself on how you can use your super (via a SMSF) to purchase property.  It seems complex initially, however once you get your head around it it is a fantastic strategy.

I have just been reading from the Capital 360 website here:
http://capital360.com.au/superannuation-self-managed-smsf-to-buy-property-with-capital-360/

I find it interesting that they utilise a unit trust structure – this is totally different to the limited recourse loans (formerly known as property instalment warrants) mentioned by Richard.  The main and probably most important difference is that when the property is owned by a unit trust, and the SMSF invests into that unit trust, the underlying property cannot be used for security for any loans – you would need to use another equity source.

Warning – self promotion alert: About a month ago I posted an article on my blog about the 6 ways to purchase property using your super:
http://www.evolvemysuper.com.au/strategies/6-ways-to-purchase-property-using-your-super/

I have been personally involved in assisting a number of clients purchase property with their super using the limited recourse loans which have been around for almost 3 years now (well – the law changed 3 years ago – it took the banks a while to catch up and develop new loan products to take advantage of it).

A couple of key things to realise in regards to purchasing property in your super with a limited recourse loan

– It is not for everybody – it is good for people who want to buy and hold – i.e. not looking for a quick increase in value and then flick it off for a profit
– It does costs more to set up – the main killer is the bank legal fees – but hopefully we will see these coming down soon
– Cash flow is king (isn't it always!).  You want any property owned by your SMSF to be able to look after itself cash flow wise.  Any contributions going in (such as SGC and salary sacrifice) should be built up to act as the deposit for properties #2 and #3 etc – you don't want to be dependent on contributions to cover interest payments and other costs – it is a false economy
– You can still negative gear – with depreciation & capital works deductions you can have a property in a SMSF which is both cash flow positive but has negative income for tax purposes – the negative gearing benefits are obtained via salary sacrificing pre-tax dollars
– You are unable to re-draw on the equity. You need to sell the property to realise any built up equity.
– You can renovate properties purchased with a limited recourse loan – but you can't borrow to do it. You also can't renovate to such agree that you create a whole new 'replacement asset' – so you can't knock-down and rebuild.

I could go on and on about buying property with super – I personally enjoy working through the costs and benefits with people and seeing whether it is for them or not.

Anyway – I am not saying Capital 360 is bad – rather the opposite.  I like the fact they seriously look at the most appropriate structure for their clients.

I guess you simply need to do your research and decide what is best for you.

Good luck and please feel free to ask more questions if you have them.

There was an article on SMSF in yesterday Fin Review – I have a copy here if you want me to scan it and email to you

no worries – let me know your email address

That is great news Number 8

Good luck with everything – I hope everything runs smoothly with the bank.

Due to the typically higher yields, commercial properties work really well when purchased by a SMSF using a limited recourse loan.  The banks typically will only lend up to 65% on a commercial property when purchased by a super fund, and based on this LVR and a gross yield of 9% to 10% a lot of the time the property will be cash flow positive (or maybe only slightly negative).

Cash flow positive property is perfect within a SMSF as you can quickly build up surplus cash via the excess rent and contributions (including salary sacrifice) – which in turn can be used to purchased more property or diversify into other types of investments.

It is good to see the costs coming down in regards to the set up / structure and advice surrounding a SMSF purchase using borrowings.

One cost that hasn't come down however is the bank legal costs – $2,000 plus is such a blatant rip-off – I mean how long does it take to review a SMSF trust deed and the associated docs such as the contract and the bare trust docs – a couple of hours max? 

I encourage anyone involved in assisting people purchasing property using SMSF loans to put pressure on the banks to make them put pressure on their lawyers regarding these costs – if the banks want the business they will need to move.  I know it is unlikely that it will make an immediate difference – the banks have too much power – but I am feeling unreasonable, and as George Bernard Shaw said:

"The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man."

And I want some progress!

It is always good advice to shop around when looking for a loan provider – and SMSF limited recourse loans are no exception.  I have a comparison of current SMSF loan providers here.

I would be interested to hear Number 8's feedback through the process and whether he comes up against any hurdles / issues.  Feel free to share mate!

On a related topic, there is a company up in Brisbane which have a total upfront cost of $1500 inc GST to set up and process a SMSF limited recourse loan.  The amount includes all bank legal fees, but doesn't include any advice by an accountant / SMSF specialist (including SMSF set up) or the banks loan establishment / application fees. 

They use St George and have managed to negotiate a better deal for their clients.  They have a couple of noticeable differences to a typical SMSF limited recourse loan (instalment warrant) structure however:

• They have their own special purposes trustee – which holds the title as trustee of your custodian trust for the benefit of your SMSF
• They inter-twine their trustee into the loan / title – meaning if you want to refinance down the track you will basically need to set the whole thing up from scratch – which will be challenging even if possible
• They charge an ongoing % fee on the value of the underlying property
• They handle some of the administration as their trustee company is on the title and also look after any changes if required to ensure the structure stays compliant with any future change to the SIS provisions surrounding limited recourse borrowings

Overall this type of structure has some good points, but it also has some drawbacks – it is up to each individual investor and their advisers to determine whether it is right for them.

I was reading some old posts of mine on another forum – and I was predicting that purchasing property using your SMSF with borrowings would become more commonplace, and that once mortgage brokers, real estate agents and anyone else with a vested interest in property and loans got their heads around how it works we would see it become more mainstream. 

I think I can safely say I was right!

Once again if anyone else has any questions about buying property with your super please throw them out there!

Hi Richard

Investec Bank offers LVR up to 90-95%. The interest ~ 8%