Guest blog: Benefits of owning property through a Self-Managed Superannuation Fund

By the resi financial blog team, 21 May 2014

Benefits of buying property through SMSF

If you’ve been looking for something to start investing in for your retirement you may already know what a Self-Managed Superannuation Fund (SMSF) is. For those who don’t, an SMSF is a fund with a maximum of four members, all trustees; and managed by the members for the members. Its aim is to provide all the usual returns to its members on retirement or their dependents on death. The growth in Australia over the last 15 years in SMSF has been exceptional, from being just 12% of trust funds in 1998, to 32% today.

Why the Popularity?

The reasons for this phenomenal growth are many. A greater understanding by the man in the street of what they are and how they work has helped. With such a small group of trustees everyone has a say in the management of the fund, its portfolio and how and in what investments are made. Advantage can also be taken of the various tax concessions offered by the Australian Tax Authorities for this type of fund. The overall running costs of an SMSF fund are much lower due to the fact no member, or trustee, is allowed to charge for services they render to the fund.

Advantages of Property within your Portfolio

Considerable advantages lie with investments made through your SMSF. One of these is the Australian Property Market. The purchase of a commercial property for the use of the fund allows the benefit of rental income and property value increases being directed to the fund, helping the funds growth in the future. The Australian residential property market is another area being heavily exploited by holders of SMS funds.

All investment portfolios, immaterial of type should contain an element of property investment, be it commercial or residential. Property provides diversity within the portfolio while adding an element of security and stability due to its long term but lower risk factor. Compare this with the short term volatility of large gains, or large losses, which haunt investment in the stock market.

Providing Fund Stability

Again, compared to high risk high yield short term investments; property, commercial or residential, provides long term stable increases in capital growth in the form of increasing property valuations, while enjoying the benefits of regular rental income to swell the SMS funds. Advantageous tax allowances are also available in the form of such things as management and repair costs of properties within the portfolio.

Improved Incentives and Fund Security

One of the biggest drawbacks to being able to use property investment within an SMS fund has always been the initial high financial outlay. Prior to 2007 the ability to borrow funds to secure property purchases through SMSF was very limited. September 2007 saw many of the restrictions lifted and further legislation in 2010 drafted the fine tuning of the system.

Limited Recourse Borrowing Arrangements

However, the only way to use SMSF for any form of property purchase is by using a ‘limited recourse borrowing arrangement’ (LRBA). The regulations involved regarding SMSF and LRBA, saw the release of a draft copy clarifying the rules in September 2011, and in May 2012 a final ruling on the regulations was released. For instance, borrowed funds can now be used for the purchase and renovation of older properties, while not being used to ‘improve’ them. The only recourse for lenders, should there be any default, can only be on the property the loan refers to, giving the SMS fund greater protection for the remainder of its investments.

The clarification of these regulations makes SMSF investment in commercial and residential property an even more attractive proposition and fund managers are quickly taking advantage of available properties. While the high initial outlay of property purchase, including deposits, legal fees and stamp duty, plus the time needed seeking out a lender prepared to lend under the LRBA may seem daunting, the advantages far outweigh the disadvantages.

Consider all the Possibilities

As in life nothing is guaranteed and many countries have experienced property price crashes but, taken overall, using property investment in your SMSF will provide the fund with good long term asset increases and regular rental income. Currently, residential property is returning about 10.3%pa, which comprises 6.8% capital growth and a 3.5% net income. Add to that the tax incentives and tax breaks, and it is an extremely attractive proposition. 

Talk it through with other members of your SMSF, check out the facts, rules and regulations. Seek out some lenders and compare rates and seek advice from a good, impartial, uninvolved financial advisor. When you’ve done that, adding property to your SMSF will be one of the best moves you can make to provide the fund with stability and long term growth.

To work out a financial plan to suit your situation, including SMSF creation, take advantage of our free initial financial planning consultation worth $330.

 

Author Bio: Rowan Hemsley is a Licensed Valuer and the director of Qwest Valuations, a boutique property valuation and consultancy firm in Perth, Western Australia. Qwest Valuations provide independent and impartial property advice to a range of SMSF clients. Rowan has many years of experience in the valuation industry and possesses an intimate knowledge of the Perth property market. You can connect with Rowan on Google+

 

Categories: Guest blog, Qwest Valuations, SMSF