Buying an investment property in my SMSF

Hi Roxy

I think you definitely need to seek Professional advice before going down the SMSF path.

When you purchase a property inside a SMSF all of the rental income is quarantined within the fund itself and can only be used to repay the SMSF loan itself. It cannot withdrawn for personal purposes or to pay off your PPOR.

Depending on your level of employer / personal contribution and the likely rent you will receive I would suggest you went with an 80% lend and then place the balance of your SMSF in a linked offset account. This gives you flexibility and choice going forward.

Cheers

Yours in Finance

Hi Roxy, great that you are thinking about using your Super to build your property portfolio. With borrowing through an SMSF is complex however, can be very easy with the right advice as has been eluded to above.

Re the 1st question, yes with $263k in Super you would be able to purchase more than one property. However, this will depend on the purchase price.

Use the example of residential property purchased for $400k. You will need 20% deposit, or $80k in super (which you have) plus acquisition costs (stamp duty, loan fees and accounting and legal fees). You can for a resi loan obtain 80% LVR generally subject to servicability being satisfied.

For each property purchased using a borrowing, you will need to set up a structure commonly referred to as a bare trust. Remember this is for EACH purchase. 

You can also use a 'related party' loan which again will require advice.

Remember in a super fund, you need to satisfy the sole purpose test, which means for a residerntial property you cannot live in the property, it must be rented out at arms length.

Re servicability of the loan, think of a property that has a 5% yield, 'generally' this will cover your loan repayment and additional cash contributions (at a concessional rate) can be used to build your retirements savings andpurchase more properties. We have many clients thinking this way, and I support it with the right education .

Hope that helps, and happy that we can educate you on the SMSF journey.

Cheers, Ivan

As the others have explained, you cannot use SMSF money to pay off your mortgage.

I think the confusion you are experiencing is due to the terminology "beneficial interest".  I'll explain what it means.  I suspect you think that "YOU" are the beneficial interest and thus you get the rent.  This is not the case.

The "legal interest" is the entity set up to "own" the property while it is under mortgage. The easiest way to think of it is that it is a mini company+trust structure set up within the super fund.  Each property under mortgage will have its own little setup.

When the mortgage is paid off, ownership of the property shifts to the "beneficial interest" which is the SMSF itself. 

In the meantime, while the mortgage is getting paid off, the rents are coming into the main SMSF bank account (ie the beneficiary's bank account) anyhow.  Unless the SMSF has its bank accounts set up differently.

The SMSF will only be able to borrow a maximum of 80% of the property purchase price.  Banks will not lend any higher on this for residential property being purchased in super.

You cannot leverage equity growth in a SMSF property.  That is, you cannot keep the SMSF property that has grown in value and use its value growth to fund deposits of further properties. The only way to get at that value growth is to SELL the property, divide the pile of money into two and buy two properties.  I hope that makes sense.

Hi Roxy

Where are you based?

We run a number of SMSF workshops throughout Australia so maybe we can get you along.

Cheers

Yours in Finance