Having a self-managed superannuation fund (SMSF) has become a popular decision over the last few years. Seemingly the on trend decision for everyday Aussies aiming to take greater control of their financial future. Whilst the positive results of taking such a step are evident, one thing that we strongly encourage is to research all of the ins and outs, before deciding whether an SMSF is right for you.
It is essential to understand every single one of the rules, regulations and obligations of a self-managed superannuation fund – especially when set up with the intent with which to be able to borrow money and ultimately purchase an investment property.
During this short article, we will look to break down just a handful of the major restrictions you will face when purchasing a property with your super, which we hope will help you to navigate the property market and understand the very small portion of properties that are suitable to be purchased through a self-managed Superfund, against the vast majority that you will see on realestate.com.au, which unfortunately are not able to be purchased due to very specific lending criteria laid out by the small numbers of banks that will offer loans in the space.
A finished build, purchased under a single contract
Firstly, one major thing to note when purchasing a property through your self-managed superannuation fund is that the property must be completed. It cannot be off the plan or under construction. You cannot purchase what is known as a “two-part” contract for house and land – you must instead purchase a single contract, with both the house and the land considered in the same sale.
Location + Demand
The property must be in a high rental demand area, typically summarised as a 50-kilometre radius from an Australian Capital City or a 35-kilometre radius from Australia’s Major’ city, usually those having a population of over 100,000 people or greater, of which there are roughly 17 cities available in the 8 States/Territories of Australia. The cities that fall within those areas, with a vacancy rate of below 1%, usually show us the rental demand statistics that we are seeking to encourage our investors to consider purchasing in that area.
The bank has to like it, too
If looking to borrow money through your SMSF to assist in purchasing your property, the bank has some say in it, too. They would prefer the property to be as new as possible as these properties generally have the lowest ongoing maintenance costs and are typically still held under a builder’s warranty for major structural components. They have a higher rental demand, they have greater tax depreciation benefits, as well as, the most probable increased resale value.
Purchasing a newly completed property with high-quality construction, within an area of high demand, will provide an investment opportunity that not only has high tenancy rates, but also a low probability of continuous costs to you as the owner.
Positively geared
The property must be at least cash flow neutral, but ideally, cash flow positive, meaning that the rent per week is more than every single one of the outgoings to the property. This is easiest summarised by seeking a property that has a 4.8% rental yield or greater. This means that you must receive a minimum of 4.8% of the amount you purchased the property for in rent each year.
This statistic alone makes it very difficult to be able to choose an investment property in cities like Sydney and Melbourne, where the average rental yield is below 3%. However, places like the Sunshine Coast, Brisbane, Gold Coast, Newcastle, Adelaide and Hobart are just a few examples of cities which offer an abundance of opportunities that meet this criteria.
No personal gain
The final thing to consider is that you must have no personal gain from the property, meaning that you can never live in it nor can never have it rented/tenanted by anybody that you are knowingly aware of. You can never complete any building maintenance or repair work yourself; it must be done through a licenced third-party tradesperson. You cannot rent the property out for yourself; this must be done through a licenced third-party agency and
lastly, you cannot develop or improve the property. You can restore it and maintain it to its original state, but you cannot subdivide, build a second storey, create a granny flat, turn it into units, so on and so forth.
These regulations are what make finding a property to purchase through your self-managed super, both the most exciting, but most usually the most frustrating part of the process. The reason Corbwood & Associates has grown so quickly and been fortunate enough to help 1000s of Australian families is that we have a system that separates those that you can consider purchasing from those that you can’t, making it a little easier to decide on exactly which dwelling is the right one for you if this is a path you ever decide to explore.
To understand more about buying property through self-managed superannuation ask questions about your personal circumstance or simply to find out if you qualify to do this, contact us on 1800 OUR SMSF (687 7673).
Related Tag: Using Super to Buy a House Australia