Puzzle Finance Blog


Pros and cons of buying property through SMSFs


One of the big new trends in our marketplace today is the increasing number of investors buying property with their self managed super funds (SMSFs).

Back in 2007, the super rules changed to allow people to borrow through their super funds for investment. It’s taken a while for people to get used to the idea of running their own super fund, let alone borrowing through it to buy a property. However, with more and more people setting up their own super funds today, we’re seeing a significant flow-on effect in the property market.

Latest figures from the Australian Tax office show a 50 per cent increase in property investment via SMSFs since June 2008 and a 13 per cent jump in the past year alone.

Just like the First Home Owners’ Grant prompted more first homebuyers to get into the property market, more people are taking advantage of the opportunity to borrow up to 70 per cent of a property’s value through their SMSF to buy an investment.

Australia’s largest mortgage broker, AFG reports that for every first homebuyer that takes out a new mortgage in Australia, there are three property investors doing the same right now.

I think SMSF property investing is becoming more popular because there are very strong rental returns available, the costs have dropped and quite simply, more people are realising the benefits. I think a lot of people ignored the opportunity before because running your own super fund sounds pretty daunting and the structures used to buy property through your super are pretty complicated.

On paper, buying property with your super sounds like a great idea and there are definitely many benefits. But there are also many rules and regulations so I wouldn’t recommend using this strategy without getting some independent advice. Here are the main advantages and disadvantages.

Advantages
  • If you buy a property with your super fund and hold the property until after you retire and your super goes into the pension phase, you pay no tax on either the capital gains if you sell or the rent if you continue to hold your investment.
  • Before retirement, capital gains and rent earned by your SMSF are taxed at only 15 per cent (if you hold the property for more than a year, this drops to 10 per cent on capital gains).
  • Direct control of your super investments and a real understanding of where your money is invested.
  • Diversification in your portfolio.
Disadvantages
  • If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the fund – not your regular income.
  • You can't live in the property and neither can any friends or family members.  
  • You can’t renovate a property purchased through a SMSF while it is still under a loan.
  • There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
  • Running a SMSF is complicated and penalties for getting things wrong are high. However, you can pay a professional to run it for you.
  • Buying property through a SMSF is generally only suitable for funds with $200,000 in combined funds.


Buying property through super is a great way to invest for retirement but it’s probably more relevant for people who are only 20 to 25 years away from it. Not only do they have more super money at their disposal, they are also more likely to be able to hold the property until after retirement to realise those big tax savings.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Posted by John McGrath - Switzer News on 23rd August, 2011 | Comments | Trackbacks
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