SMSF Property Myth: How Much Super Do You Need To Buy An Investment Property?
Just how much superannuation do you need to buy a property investment?
The answer will surprise you. Many people have this misconception that you need tons of money to buy investment property using your SMSF. With as little as $100,000 in super, you can use a SMSF to buy property. The change in legislation that allowed for this has opened the doors for many investors over the years who continue purchasing property inside an SMSF.
How It Works
You can purchase both residential and commercial property inside an SMSF. For residential property, you can get up to 80% loan to value ratio and for commercial property, you can get up to 65% loan to value ratio. Residential purchases are currently very attractive to many investors since investors can enjoy 6% fixed interest rates for the first two years and manageable variable rates starting at 6%. Moreover, yields across capital cities continue to rise therefore making this investment ultimately rewarding in the long term.
Residential SMSF Loans Features
With a residential SMSF loan, you can borrow up to 80% of the investment property provided your super has a corporate trustee. You also get access to an interest offset facility in the case of variable loans. Moreover, you can also purchase property within your super in the event your borrowing capacity based on your income position outside of super has been exceeded. You can therefore add property to your portfolio if banks are placing restrictions on you outside of super. When banks assess applications for residential SMSF loans, they consider rental incomes from the investment property in addition to superannuation contributions currently set at 9% pa of salary in most cases.
A Case Study
Let?s take the example of Jason an IT Professional from Sydney who wishes to buy property in Brisbane worth $350,000 excluding stamp duty, legal, bank, structure and other costs amounting to approximately$19,000. Given its location and its state, this 3 bedroom, single garage house would generate rental income of approximately $18,200 pa or $350 per week. So Jason decided to take a 2 year fixed loan of $280,000 at 6% interest only. This means that he will need to pay yearly loan repayments of $16,800. When these repayments are added to projected costs of rates of about $3,500 and actual costs of $2,100, Jason is left in a negative cash flow position of $4,200. Fortunately for him, Jason's employer contributes $10,000 p.a to his super (Superannuation Guarantee Contributions SGC) and therefore Jason can afford to purchase the property seeing that it is positively geared.
Just How Much Would You Need To Start?
You would need to the purchase price plus costs less the loan amount to start. In the case of Jason for example, he would need $369,000 ($350,000 plus $19,000) less the loan amount of $289,000. The required super amount in Jason's case would be $89,000.
Need For Expert Advice
Rules surrounding the purchase of property within super are inherently complex and all investments carry there own risk. It is therefore imperative for you to consult accounting, finance and legal experts before signing on the dotted line. Moreover, many banks require the signature of an accountant or financial planner for the deal to be signed off. Speaking to professional advisers at the outset is prudent.
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Disclaimer: The information on this site is general in nature and not financial advice. Visitors should consider obtaining independent advice before making any financial decisions.
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