As mortgage brokers, we are in a unique position of knowing what is happening in the home loan market, not only in Rockingham, but across the Perth area. One of the undeniable trends over the last few years has been the rise of the small property investor. Many of those investors are buying properties through their self managed super fund (SMSF).
What is an SMSF?
We know this is elementary and basic, but we feel it is worthy of inclusion. While many Australians choose to put their supers into an account run by their workplace or into an industry or retail fund, an SMSF gives them the opportunity to manage their own supers. With an SMSF, you can be the sole trustee and run it yourself, or you can select one or more trustees. You are allowed to choose your vehicle of investment, including real estate.
You are also allowed to create an SMSF with more than one person. Those who pool resources find that they have more money to work with and therefore more power to purchase properties. However, if you decide to choose this option, always choose your investment partners wisely and make sure you have a good financial planner for advice.
Why Real Estate?
Many Australians choose real estate as an investment vehicle because it has consistently delivered long-term returns. For those who have high risk tolerance and choose to invest aggressively, real estate has the potential to provide the best short term and long-term returns of any investment. Those who choose the conservative approach find that real estate usually outperforms commercial funds.
The rules can be a bit tricky, with supers being limited to borrowing 50% or 70% of the purchase price, depending upon the price of the property in question. However, those with a solid investment strategy find that they are able to leverage capital growth to fund more investments down the road.
Whatever your risk profile, you can usually find a level in which real estate makes sense. While most investors use real estate as part of a diversified program, those who focus on real estate often outperform a high percentage of their peers.
What Lenders Like to See
If your SMSF is buying properties, lenders have requirements that are sometimes different than those for someone buying their home with money that isn’t part of an SMSF. The first requirement: 30% of the value as a down payment.
They will also want to see rental income that will allow your fund to cover the payments. Since your SMSF will usually have to assist you in making payments, they also want to see a pattern of contributions that tells them your SMSF is capable of making those payments.
The last, rather obvious factor lenders look at: your SMSF must be compliant with all ATO and ASIC regulations.
The overriding benefit of using an SMSF to invest in real estate is that you won’t pay any tax on capital gains until you retire. That means you can compound money that you would normally have to pay in capital gains tax if you were investing outside of your super. This is a huge benefit and real estate is a way to leverage it even further than a standard fund would.
For example, if you buy a property for $500,000 and it sells for $1 million 20 years later, you can save as much as $116,250. Capital gains tax has a ceiling of 15% in a super. That ceiling goes down to 10% if a property is held for more than 12 months. Many Australians use negative gearing to totally eliminate capital gains tax. However, negative gearing is a controversial strategy. It doesn’t always create profit and it may not be around for much longer.
Call Smartline Rockingham
If you are going to use your SMSF to invest in property, you will need a great financial advisor and a great mortgage broker. The mortgage brokers who can help you obtain the right loan are right here at Smartline Rockingham. Call us today: (08) 9527 1800.