All Topics / Creative Investing / Investing through a SMSF

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  • Profile photo of Rory BreakerRory Breaker
    Participant
    @rory-breaker
    Join Date: 2010
    Post Count: 26

    There are many on this forum who have property through Super and/or who are thinking about the proposition. 

    I fall into the category of thinking.  To me however the financials of investing though super appear to be straight forward.  I have provided an example below for discussion.
     
    Asume James has $100K invested with Joe Blogs Super PTY LTD returning a modest 6% per annum so at the end of the current year James will increase his fund by $6K less super fees.
     
    James considers the laternative, investing in a vendor finance deal.  James invests in a $400K property using his $100K already acquired knowing he will bank a healthy 10% return per annum.  At the end of the year James super fund has increased by $40K.
     
    In summary, James current super fund would stand at $106K in a years time if he continues to use Joe Blogs Super.  His opportunity cost in this case is $34K – in one year.
     
    Why is this so?
     
    James is able to leverage his fund and enjoy returns off $400K.  Also his returns are more stable in the sense that he controls his investment and he is not open to the volatility of the stockmarket.
     
    The opportunity cost is too great for James to ignore and he should adjust his super strategy to a more financially rewarding strategy.

    This example however is only looking at the financials and not the process of acquiring property through super.  I believe Richard Taylor has an e-book on this process.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Is a SMSF able to invest in a company that does vendor finance? I haven't considered this before, but off the top of my head would suspect it couldnt unless the company was unrelated to any member of associate of a member of the fund and the property owned by the company were unmortgaged.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of Anthony KAnthony K
    Participant
    @anthony-k
    Join Date: 2010
    Post Count: 56

    Hi Rory and All
    I have been establishing SMSF's and planning asset acquisitions mainly in real estate since the late 1970's but this description by you Rory has me baffled. You have  $100K in capital which takes up a 25% interest in a property. Who supplies the other 75% – $300K ?. How does the SMSF gain a 40% return but only provide 25% of the capital ?. Is this gain gross or net of costs ?.
    Your terminology of "opportunity cost" appears to be incorrectly applied and with such loose descriptions your SMSF planning would be ill founded. Setting out explicit detail is critical when financial relationships are planned to be made and which involve a SMSF.
    Finally a SMSF investing in a venture capital company would usually happen via a shareholding and having read many dozens of ATO Rulings both Private Binding and Public determinations the risk of company dividends being deemed to be "special income" and taxed at the highest marginal tax rate  is extremely high and probably cannot be avoided. If you are considering any plan of this nature it must be detailed in conception and execution as to how it is to be initiated and how it is to be finalised i.e. what is the exit strategy to be developed by the SMSF and other parties.
    I would be interested in more precise details of the proposed arrangements.
    Regards
    Anthony

     

    Profile photo of Rory BreakerRory Breaker
    Participant
    @rory-breaker
    Join Date: 2010
    Post Count: 26

    Forgive me if I have this wrong.  Assuming the SMSF has been set up to comply with Australian Super Rules, then the fund is entitled to make some sort of investment – in this case buy property.  The fund may also be entitled to borrow funds for investing purposes against its holdings ($100K) and so buys a property worth $400K.  Note the bank may require more capital from the SMSF (a question maybe a broker can answer?)  In any case, the property is vendor financed giving it a positive cash flow as is the case with vendor deals. 

    The figures above are examples only.  In most cases I have achieved greater returns when involved in vendor deals than 10% ($40K return per annum less fees on a $400K property on average).  In fact, I would not enter a vendor deal only showing this return figure taking into account the up front and back end profit.  The expenses are generally paid by the purchaser in VF deals although this may change from deal to deal.  For example land tax and council rates were continued to be paid by the current owner in a recent deal as opposed to the purchaser taking on the costs.  This was applicable given the deal was for land only and it was continued to be occupied by the current owner.  Both parties were satisfied as is the goal in the VF game.

    An opportunity cost is considered a cost incurred if an alternative investment was not undertaken.  Not all investments are undertaken that are more financially rewarding than the current investment.  This may be due to higher risk, no available capital, limited resources, etc.

    Venture capital companies are not for me.

    Anthony – I cannot give more specific details only that this was meant to provoke discussion.  It is something I am looking at doing through my Super fund however I am seeking legal advice on whether or not JV's can be applied to a SMSF investment as mentioned by Terry.  I would be happy to share specifics with you if the strategy eventuates.  I have no basis to comment otherwise. 

    Profile photo of Anthony KAnthony K
    Participant
    @anthony-k
    Join Date: 2010
    Post Count: 56

    Hi Rory and All
    Thanks for the info Rory,
    so your SMSF puts up $100K and the vendor puts up the balance,
    Then you share the profit 25% – 75% ?
    What does the bank do ? its irrelevent if the vendor replaces the bank and the fund has not borrowed unless the title has been changed to the SMSM – Security Trust. ?
    OR
    Your SMSF has $100K deposit and the bank puts up $300K  ?
    The highest current bank LVR is 80% so thats fine
    For you to make 10% on $100k someone has to pay 10% on your SMSF equity or loan.
    I am still confused by your deal Rory.
    Please respond.
    Regards
    Anthony

    Profile photo of notPuzzlednotPuzzled
    Member
    @notpuzzled
    Join Date: 2012
    Post Count: 1

    http://www.fairtrading.qld.gov.au/be-wary-of-loans.htm

    Hello all

    The wrap loan or rent/buy scheme is a way of extracting precious dollars off an aussie battler who has been turned down by conventional lenders. I'd like to see the stats as to how many of these fail from the aussie battler's perspective. (the promoter invariably wins) They've been around so long I can't remember and hallmarks include being spruiked at "investment  seminars", promoted on A4 paper on power poles and in 2 line adds in community newspapers.

    Little wonder the Queensland government warned consumers – see above link

    Whilst there are legitimate reasons for using vendor finance. there are more honest ways of making money than ripping off the aussie battler who will ultimately default on his rent/buy scheme.

    If you do go down that path, be prepared to have a silent number, address off electoral role etc when/if you start the process of evicting the home occupier – we all love our home and you will need nerves of steel to put a family with young kids out of their home. Don't tell your family or friends how you make your money becuase you are now at the bottom of the most depised (far far, far, below used car salesman)

    Yes, I have seen these in a SMSF, often in conjunction with  a "joint venture" (see a legal dictionary if you think that means partnership, tenants-in-common or joint tenants)(seek professional advice if considering a joint venture in a SMSF as some in the ATO despise them as very questionable and dangerous attempt to circumvent the superannuation law) My slightly moral high ground makes my lip curl a little when I see a buy/sell in a SMSF

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    I must admit i have read the original post and responses several times and still cant quite understand the question.

    If the question is:

    1) Can a SMSF buy a property and then onsell it using an instalment contract. If so the answer is YES. I own several properties inmy SMSF which have been onsold. i am also a Director of First Home Owners Group a Vendor Finance Company dealing solely in Qld.
    As long as the SMSF is not seen as carrying on a business and such investment meets the terms of the Trusts Investment strategy then you should fine. Other considerations though.

    2) Can a SMSF borrow in order to buy a property and then on sell it using an instalment contract. From a convention lender – NO from an inhouse related lender – then possibly done correctly.

    3) Can a JV be done with the Vendor then this depends on the terms and nature of the arrangement.

    All interesting avenues to increase your returns but fraught with danger in the wrong hands.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of Rory BreakerRory Breaker
    Participant
    @rory-breaker
    Join Date: 2010
    Post Count: 26

    Ok, my mistake.  The oroiginal post has left out some detial, perhaps too much! 

    Thank you for questioning the example Anthony and clarifying some points Richard.

    Richard in your answer to Q1 did the SMSF have all the funds available to purchase the property and did not borrow?  I was also under the impression you could only have 1 investment property under each fund.  Is this the case?  Do you have a web address for your company in Quensland – I could find nothing in a basic surch?

    What do you mean by an in-house related lender?

    Q2 is how I saw one way of doing a property deal with a SMSF however are your saying Richard the bank will not give a loan for the original purchase of the property if the SMSF's investment strategy is to onsell using an Instalment Contract?

    Can the SMSF borrow to buy a property from a conventional lender then once the property has settled, onsell using an Option's Contract?

    Profile photo of Anthony KAnthony K
    Participant
    @anthony-k
    Join Date: 2010
    Post Count: 56

    Hi Rory, Richard & All
    Unfortunately there has been some loose talk on this subject.
    let me please help you all, unless you explain in detail EXACTLY what you propose and HOW you intend it to be implemented you will fail if the ATO later decides to examine the transactions.
    Example:
    Richard,  I take issue with you on a planned continual strategy whereby you regularly buy and sell properties within your  SMSF. This is not an activity which I feel is concentrating on retirement but actually resembles a trading entity activity.
    It also resembles share trading except the traded assets are different. Now I know we will have adherents who state that this can occur. The ATO is on the record in the Private Binding Ruling (PBR) area which clearly state that this is not an activity which a complying fund can follow without major risks of breach. I studied over 20 PBR's for research on a proposed client strategy and it is clear that the ATO will act against these sort of arrangements. This now brings me to the Investment Strategy, if a fund is investing and regularly trading in derivatives which is essentially what bare trust borrowing involves – it needs to have a Risk Management Strategy which is a very comprehensive technical document that the majority of SMSF trustees would not have the experience, education or knowledge to compile. I also put it to you that if you had a fully stated strategy of purchase and resale of any item as your strategy you would get a "please explain" from your Auditor or worse a Qualified Audit and perhaps an ATO incident report.
    Yes you could have an acquisition period followed by a change of strategy and a sale process. However you would need to be cautious if this was a regular and continual process.
    My tip is this – always review everything you propose  carefully as seen through th eyes of an objective third party, or better – via the ATO's view as a collecter of your SMSF money if they can treat you as a transgressor of SISA/SISR.
    Regards
    Anthony
     

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi notPuzzled

    Welcome to the forum.  We hope you enjoy you time here.

    You have an interesting view of vendor finance (VF) and I'm guessing it may be caused by the number of cowboys that flocked to VF, as the newest million dollar making idea, when it became popular again in the late nineties/early naughties.

    As is always the case, the cowboys found out it wasn't easy and 'most' of them have disappeared.  Of course, all industries have their cowboys and we still have a few.  However the industry, via the Vendor Fiance Association of Australia, is working hard to get our message out there, i.e. that there is a viable and legal alternative, to traditional home loans.

    A short history of VF in Australia is available at:
    http://www.negative2positive.com.au/index.php?option=com_content&view=article&id=50&Itemid=75

    One of the biggest changes to the industry happened in 2010 with the advent of the National Consumer Credit Protection Act.  This Act has been responsible for a very positive change to our Industry, i.e. we now have to hold an Australian Credit Licence or be an authorised Credit Representative, if we want to supply or give advice about any credit contract.

    May I suggest you do a search of the forum using the search phrase 'vendor finance'.  It's a great resource.

    Cheers,  Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

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