You might have heard how leveraging an SMSF to invest in property could pay out big time once you retire. You don’t need to pinch yourself; this isn’t a dream. Yes! You can invest in property using your superannuation, in fact, people have done it for decades. It can be tricky for first-time investors, so I’m here to help you out today. Here is everything you need to know about property investment with an SMSF.
What is a Self-Managed Super Fund (SMSF)?
An SMSF is a superannuation trust structure that will give its members substantial benefits once they retire. What separates SMSFs from other super funds is that the members are also trustees of the fund. This gives each of the members more control over how the funds are used since there can only be a maximum of four members of an SMSF.
How SMSFs Work
SMSFs have their own Tax File Number, Australian Business Number, and transactional bank account. These three things allow members to receive rollovers and contributions, pay out pensions, and the focus of this article, make investments. When setting up an SMSF, you have two options regarding the trustee structure.
First, members can function as a corporate trustee. This means that a company acts as the trustee, with each member of the SMSF functioning as a director. This structure makes recording and asset registration easier.
The second structure is an individual trustee. This gives each member more control, but there must be a minimum of two trustees for the SMSF.
Buying Investment Properties with SMSF
So, how do you leverage an SMSF as an investing tool? There are a few ways to go about it, but this method has proven to be the most profitable for my clients.
First, you set up the SMSF, then, you and the other members can roll your superannuation savings into the fund. From there, you can use these funds to place a deposit on a property or buy it with cash. Keep in mind that if you’re using the funds as a deposit, you’ll likely need an SMSF Loan to finalise your purchase. The good news is SMSF loans can cover up to 80% of the purchase price. Once you decide to rent out the property, your rental income will go directly into the SMSF which you can use to help pay the loan payments.
Advantages of This Method
The biggest advantage is that you can use the buying power of all members to make more substantial investments. If you were investing alone, you might not have the balance to cover the deposit on a property, let alone the loan payments.
Second, when you invest with an SMSF, it is more tax-effective. SMSFs are taxed at 15% including a 33% discount for any assets held for 12 months or more. Chances are this is less than your marginal rate, providing you with savings all the way until retirement.
If you’re only a few years out from retirement (5-10 years), this might not be the solution for you. Investing in property with a super is a long-term game. For instance, people that are still 20 years away from retirement likely have 20 years’ worth of contributions and sufficient balances to cover deposits. Also, they can afford to hold the property for 20 years until retirement, the whole time watching the value skyrocket, providing more benefit once they retire.
Take The Next Steps
If after learning this information you’re excited to learn more about this incredible investment method, book an appointment with Adpen! We’ll help you get started in property investment and provide you with more information about SMSF. Make sure to subscribe to this blog for future articles and follow Adpen on social media!