It’s no secret that Australians love to own and invest in property. This, combined with the effect of the GFC which has severely impacted investment fund returns, meant that when the government changed the rules to allow the purchase of investment property through Self Managed Super Funds, the idea became popular almost over night.
And while there are many good reasons to consider investing in property through your SMSF, there are pitfalls too, and the pros and cons need to be contemplated seriously.
Here are 5 things need to know:
1. Borrowing money through an SMSF is not as straightforward as borrowing through a ‘normal’ loan process and there are often much stricter terms and conditions. Make sure you read the fine print.
2. A property purchased through an SMSF cannot be lived in by you, any other trustees or anyone related to the trustees, no matter how distant the relationship.
3. Property investment is never risk-free. Your SMSF’s purpose is to provide for you in your retirement years. A bad investment decision can be very costly in terms of your future financial position.
4. Don’t buy a ‘renovator’s delight’. The reason for this is that funds borrowed through an SMSF can be used for property maintenance, but not property improvement. There is an important distinction between the two.
5. It’s important to consider very seriously how an investment property fits with your overall investment portfolio. And, as with other investments you make, you need to ensure you have clear plan, a goal and an exit strategy.
If you’re ready to proceed then make sure that you do your research and get professional advice.
A Mortgage Broker can help you to understand the intricacies of what’s involved in borrowing through an SMSF, and explain to you some of the concepts of the loan, such as the fact that is a limited recourse loan, which means that if you default, the bank can only access the investment property and any other property used to secure the loan. There may be personal guarantees required from you but the remaining assets in the superannuation fund are not accessible to the lender to recover any loss following a default.
A Mortgage Broker can also help you to make sure all of your paperwork is in order. This can be complex as different lenders require various types of records to verify the fund’s history.
More information about borrowing through an SMSF can be found:
• Self Managed Independent Superannuation Funds Association (SISFA)
• Association of Australian Superannuation Funds Australia (ASFA)
• Australian Tax Office (ATO)
Or you can contact us.