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Peter Rogozik Property Consulting

Beware Self Managed Super Funds

Residential property investors should be extremely wary if contemplating buying real estate using a self managed superannuation fund structure (SMSF). This structure which has created a lot of media attention lately may prove to be a fad that burns many a property investor. At the time of writing more than 400,000 investors are running their own do it yourself super fund, holding total assets worth more than 400 billion dollars.

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The goal of most residential property investors is to achieve the optimum capital growth in the medium to long term. If property selections are correct this will result in the capacity to purchase multiple properties by borrowing against equity that has been accumulated provided there is sufficient cash flow to meet loan requirements. This is a long term strategy used by many experienced property investors that can lead to a self funded retirement.

The current rules governing self managed super funds do not allow a residential property investor to use this strategy. Firstly the current rules do not allow an investor to borrow against any equity that has been gained. Borrowing against equity is the cornerstone of the abovementioned strategy and is extremely important for most property investors as it allows for multiple purchases over a period of time. Secondly, financial institutions will generally only allow the investor to borrow 70% of the property’s value. This constraint results in the investor having to provide more of his own cash funds to purchase the property.

The loan to value ratio of a property purchased outside of a SMSF can be as high as 90% therefore allowing the investor to hold on to a greater proportion of his own funds for future purchases. Thirdly the SMSF rules state that the investor is not permitted to improve the property only maintain it. This constraint robs the investor of an opportunity to add substantial value through improvements.

There is no doubt that buying real estate through a SMSF structure offers investors generous taxation benefits. Super funds pay 15 per cent tax on rental income and zero when the fund is paying a pension to members over 60. Also properties in super funds attract no capital gains tax when retirees over the age of 60 sell the assets. However a common error made by investors is to choose an investment purely for tax saving benefits. Saving a relatively small amount of money on tax while forgoing hundreds of thousands of dollars in lost capital growth due to a poor property selection is a common error amongst inexperienced investors.

It may be appropriate to purchase a residential property in a SMSF in certain circumstances e.g. if the investor is nearing retirement or a SMSF can solve the problem of funding business premises. When the business owner retires he can sell the property to help fund retirement. However I don’t recommend purchasing residential investment property via a SMSF if the investor is in the accumulation stage.

Important Note: It is extremely important to seek financial advice from an accountant/financial planner as to the correct entity to use before purchasing any form of real estate. Having to transfer real estate to a different entity could result in a massive stamp duty and capital gains tax liability. Investors should also seek advice from a qualified independent buyers advocate as an inferior property selection will result in substantial lost capital growth.

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