Before we get stuck into it, you might be wondering how self managed superannuation funds are allowed to purchase a property. Don’t properties usually cost more than the balance people have in their super fund? Often the answer to that is yes, but since 2007 the rules around SMSFs borrowing money for investing in certain asset classes were widened to include property.
SMSF’s can enter into a limited recourse borrowing arrangement (LRBA) whereby the property is owned by a separate entity to the SMSF, but expenses are payable by the SMSF. The limited recourse nature of the borrowing means that the funds other assets, such as cash and investments, can’t be used as collateral for the lender in the case of a loan default, protecting the SMSF.
PROPERTY INVESTMENT BY RETAIL AND INDUSTRY SUPER FUNDS
If you don’t yet have an SMSF but are thinking about it, you may find it helpful to understand how your current super fund has exposure to properties. This comes about in several ways, one is direct investment in commercial properties. Another is investment in index funds which themselves track commercial properties.
Increasing in popularity is real estate investment trusts (REITs). Industry and super funds can have large holdings in REITs which themselves participate in schemes like build to rent, or rent to buy.
WHY PURCHASING A PROPERTY THROUGH AN SMSF IS DIFFERENT
If you use your self managed super to purchase property, the main differences between your strategy and large industry or retail super funds strategy is the scope and the target. SMSF’s property investment scopes are smaller, often you may only be interested in buying and holding one or two properties for a long period of time.
The other main differentiator with purchasing a property with an SMFS is that the target is wide. You can be interested in regional, suburban or urban residential houses or apartments. As an individual purchaser, you have the ability and prerogative to assess individual opportunities in the open market and find a property to own you believe will be a sound investment to own. Your future retirement wealth is in your hands, and you have the means to grow it well.
CONSIDERATIONS FOR OWNING A PROPERTY WITH YOUR SMSF
Complex to establish required entity structure and comply with reporting requirements.
Needs to be held at arms length, there are many restrictions on what you can do with your property.
