What to do with $135k of super

Consider forming a SMSF with another family member?

Hi Mat,

As has been mentioned, there is no minimum amount required in super before you can set up your own SMSF.  However if your SMSF aspires to acquire property, there isn't a great deal of sense in setting up the SMSF until the balance is $70k+, because it would otherwise be a little while before it could afford to buy the first property.

When a SMSF buys property, it must pitch in 20% deposit, the stamp duty, the solicitor fee, building and pest fee, bank fees (which can be up to approx $3500 since their lawyers have to read your super fund deeds).  The remaining 80% of the property price can be borrowed from a lender that offers SMSF loans.  So this is why you'd need at least $70k in super to setup and acquire a property.

The balance you have in super ($135k) is certainly sufficient funds to set up a SMSF, acquire its first property, and have a decent pile of money left over towards saving for its second property. Meanwhile your tenants would be merrily paying off the mortgage for you with their rent payments, so that in theory, the property would be paid off by the time you reach retirement age. 

As a rough guide, if you consider the case study of a property that earns $350 per week in rent, by the time you pay its bills (property management, council rates, water rates, insurance), you'd have approx $260 per week leftover.  This figure of course varies depending on the location of the property and the pricetag on the bills.  So this leftover amount of $260 per week is $13,520 per year in income, if the property were fully-paid-off today.  In the future, as rental hikes are applied and bills go up, this figure will look different, but it is reasonable to assume the figure will buy the same amount of groceries as $13,520 can buy in today's terms.

If you have an understanding of how much income you would require per year "if you were retired today" this helps you to see "how many houses you would require if you planned to have your entire superannuation income stream coming from rental properties".  For example, if you determined you needed $35k per year, approx 3 houses would do it.  Does that help?

(Needless to say, you need to ponder for yourself, and perhaps talk with a financial advisor about an appropriate asset split… eg if you should have some of your income in property, some in cash, some in shares etc.)

Purchasing property in super is certainly a very powerful thing, due to the power of leverage (the ability to borrow to acquire the asset, and then let the rent pay the asset off).

As Terry Said you need two structures.

Recommend the SMSF with a corporate trustee ($900) – this is one structure where the members will be directors of the company or trustee.

Second is commonly referred to a limited recourse borrowing agreement or 'bare trust'. Set up cost of $1750.

This is for the SMSF only – ongoing annual fees around $1000 including audit.

In relation to the loans, many of the banks are waiving their application fee (I can name three of them), and for residential you will incur legal fees to review the deal charged by the bank in between ($600 and $2000).

Its a long term decision as you know SMSF is for retirement purposes and an advantageous tax rate is received,

My advice – get advice, don't be scared off, its all about being educated in relation to the SMSF and the opportunity.

G'day QLDs007, 

Our fees are clearly stated on our website firstly this includes custodian trustee (including ASIC fees) plus custody deed.

Let me clarify $1750 is for bare trust or Limited Recourse Borrowing Agreement (LRBA) set up NOT SMSF set up.

Are you saying $1750 is steep? please prove me wrong here.

As you know ASIC fees are just under $500. Excuse me if we are on different pages, however, I will stand by our fees 100% as has been mentioned in the thread, many others charge much higher for these services (up to $5k) and many of our clients are extremely attracted by our fees and more importantly our experience in the area.

Please clarify what your quote of $950 involved as if it was for custody deed plus custodian trustee it just would not be sensible in my opinion in consideration of ASIC fees for setting up a company plus labour.

Yes ASIC fees are $444 with no GST charged so a little less than $500.

In my opinion $1750 is expensive but i guess it all boils down to what your profit margins are and what you need to charge your clients.

We feel that $950 + GST is perfectly adequate compensation.

Cheers

Yours in Finance

Sure let me check with him first he is ok in me handing them out and then more than happy to do so.

We keep him more than busy at the moment.

Cheers

Yours in Finance

There is no such thing as a standard fund.  The question is not how much you have in super but what you plan to have in the future, and what the costs of managing this are.  Generally people try to have $150,000 or more because some accountants charge $5000 or more per year.   Clearly if the ongoing management would cost $1000 then the starting capital could be less also.

Real estate is generally a fantastic asset as it performs differently to shares or other asset classes.

In the past buying direct residential property inside of super has been out of reach for most Australians due mainly to the costs associated and the high entry level to buy just an average Australian property. To buy just one residential investment property in most states in Australia you are going to be up for costs of well over $400,000. Therefore, in the past you have had to have at least $400,000 inside of your super fund to buy just one property, let alone all of the transactions associated costs such as stamp duty.

Thankfully these rules have now been changed.

In 2007 the Superannuation rules were changed to allow you to borrow money inside of a SMSF to purchase both residential and commercial property.

Now that you can borrow money through a Self Managed Superannuation Fund (SMSF) to buy residential investment properties, it puts SMSF's in a league of their own.

For residential investment property banks are willing to lend up to 80% of the value of the property. For commercial property the banks are willing to lend up to 70%.

So, if you are looking to buy a $400,000 residential investment property using your SMSF, the bank will lend your SMSF up to $320,000 to help fund the purchase. All that you require in your SMSF is the $80,000 difference plus the funds required to cover any transaction costs and ongoing fees.

Most banks will have special arrangements in place for SMSF trustees wanting to borrow to buy an investment property. The process to gain approval for a SMSF investment property loan is very different to obtaining a property loan in your own name as any borrowing arrangements inside of super will need to comply with the SIS Act.

To meet these borrowing rules, unlike buying a property in your individual name, a SMSF can only borrow to invest in direct property through a special structure called a Bare Trust (also known as a Property Trust or Custodian Trust). Although the legal title will rest with the Bare Trust, the SMSF maintains the beneficial ownership of the property, meaning the SMSF will receive all of the rental income and capital gains made by the investment property. The purpose of this arrangement is so that the lender can take charge of the property if the SMSF fails to meet the interest obligations and pay off the loan.

Keep in mind though, leverage when borrowing to buy a direct property inside of super is considered a double edged sword. While gains are potentially magnified so too are losses. For certain types of properties, in many areas it is common to see short term declines of 20% in price. If you are forced to sell a property in a depressed market and you borrowed 80% to fund the purchase of the property using your SMSF, a 20% fall means that you have lost your entire investment (100% of your super funds contribution). So you can lose everything. It is for this reason all investors should ensure they are safe guard themselves from being forced to sell at anytime and should consider Life, Trauma, and TPD insurance to ensure adequate personal insurance cover to prevent being forced to sell a property.

There are many additional rules and restriction when buying property with superannuation. It is critical you understand these restrictions and seek professional assistance. The cost of making a mistake attempting to go it alone can be very high.