If you’ve opted to venture into property investment with your Self-Managed Super Fund (SMSF), then here’s a comprehensive guide that will equip you with the essential knowledge to begin your investment journey.
An Overview of the Australian Property Market
The Latest PropTrack Rental Report for the third quarter this year showed that the rental market continues to be tough for renters, as there’s tight competition for the limited number of available rental properties. As a result, the cost of renting has gone up considerably in the past year.
There was a 7.1% decrease in the total number of rental listings in September 2023 as compared to the same month last year. The quantity of available rental properties in September 2023 hit a historically low point, which was 22.8% below the average for the same month over the past five years. (See chart)
Moreover, during the September 2023 Quarter, median weekly rents reached $550 in capital cities and $480 in regional areas.
Self-Managed Super Fund (SMSF) Property Investment
Today, the Australian property market leans in favor of landlords, creating a good opportunity to explore investment options.
If you’ve already made the decision to venture into the property market through SMSF investment, it’s crucial to understand that Self-Managed Super Fund (SMSF) Property Investment is a highly specialised field that demands the expertise of qualified professionals. In this regard, High Income Property strongly advises seeking professional advice and assistance from SMSF experts to ensure a successful start to your journey.
What is an SMSF?
A Self-Managed Super Fund (SMSF) is a private superannuation fund that allows individuals to take control of their retirement savings. One unique feature of an SMSF is the ability to invest in a variety of assets, including property.
Property Investment in SMSFs:
SMSFs have the flexibility to invest in various property types, including residential, commercial, and industrial real estate. The primary purpose of these investments should be to provide retirement benefits to the fund’s members.
Sole Purpose Test:
Furthermore, it’s imperative to understand the sole purpose test for SMSF Property Investment. This test guarantees that the primary purpose of the investment is to deliver retirement benefits to the fund’s members.
SMSF Borrowing for Property Investment:
To purchase property through your SMSF, you can use a Limited Recourse Borrowing Arrangement (LRBA). An LRBA enables your SMSF to borrow money specifically for property acquisition. Here’s how it works:
1. Limited Recourse
An essential aspect of an LRBA is that it restricts the lender’s claim to the property alone in the event of a default. If the SMSF defaults on the loan, the lender can only take possession of the property and not touch other assets held within the SMSF. This protects your retirement savings.
2. Deposit and Loan
To initiate the property purchase, your SMSF will typically need to provide a deposit. This deposit is often a portion of the property’s total cost, similar to a down payment. However, the majority of the property’s purchase price is usually financed through a loan obtained by the SMSF. The property, once acquired, is typically held in a separate trust structure established specifically for this purpose.
Though, technically owned by the SMSF, it serves as collateral for the loan. This means that if the SMSF struggles to meet its loan repayments, the lender’s claim is limited to the property itself, as defined in the LRBA.
3. Rental Income and Expenses
Any rental income generated by the property becomes part of the SMSF’s assets. This income can be utilised to service the loan, covering both principal and interest payments. Additionally, it can be allocated to cover various property-related expenses, such as property management fees, upkeep, insurance, and other ongoing costs.
The goal is to effectively manage the rental income and expenses. This ensures that the SMSF can meet its financial commitments and continue contributing to your retirement savings, consequently, this can increase your retirement nest egg through property investments
Steps to Purchase Property Through an SMSF:
Now, let’s delve into the steps to purchase property through an SMSF.
1. Establish an SMSF
First, you need to seek professional advice from well-versed professionals in the field of SMSF to help you establish your SMSF. It’s crucial to ensure that your SMSF is set up correctly, making it eligible for tax benefits, contributions, and streamlined administration.
2. Develop an Investment Strategy
Second, once you’re all set up, High Income Property stands ready to leverage its extensive knowledge and expertise, ensuring you have the insights needed to make prudent choices and reach your financial goals. Create an investment strategy outlining the fund’s objectives, including property investment, and risk management strategies.
3. Secure Financing
Third, Arrange a Limited Recourse Borrowing Arrangement (LRBA) with a lender specialising in SMSF property loans. You can use a combination of cash and borrowed funds to purchase the property. If you require assistance with these financial aspects, High Income Property can connect you with our trusted network of expert lenders who specialises in SMSF property loans.
4. Property Selection and Purchase
Fourth, High Income Property assists you in this stage, selecting the right properties that align with your SMSF’s objectives. Our expertise in property markets and trends allows us to identify potential opportunities and make informed property choices.
5. Property Holding Structure
Fifth, when acquiring property through your SMSF via a Limited Recourse Borrowing Arrangement (LRBA), it’s imperative to establish a property holding structure, commonly known as a bare trust. Again, a qualified SMSF professional will ensure that your setup is seamless and compliant.
What Is a Bare Trust?
A bare trust, also known as a ‘holding trust,’ is a legal structure used to hold the property on behalf of your SMSF. This trust is typically established specifically for the purpose of holding the property during the period when the loan (financed through the LRBA) is being repaid. It’s called a “bare” trust because it has limited powers and essentially acts as a legal owner of the property without any discretionary powers or decision-making authority.
6. Rental Income and Expenses
Sixth, receive rental income from the property in the SMSF. Ensure property expenses (maintenance, insurance, loan repayments) are paid from the SMSF.
7. Compliance and Reporting
Lastly, adhere to all SMSF rules and regulations, including annual audits, reporting, and maintaining compliance with the sole purpose test.
The decision to incorporate an SMSF-compliant property into your investment portfolio depends on your individual circumstances and financial objectives.
For expert guidance and property options tailored to your investment goals, Seeking guidance from financial experts well-versed in SMSFs is highly recommended to ensure a smooth and compliant process.
High Income Property has a network of SMSF-qualified professionals who can assist you in establishing your SMSF with ease. To explore your options, schedule an online meeting or reach us at (02) 8007 4001.