Why Do People Buy Property in Super?

Case study below provided shows us the difference in using a self managed super fund to buy property.

Bob is a management consultant living in North Sydney and is married to Emma who is a doctor at a medical practice in East Sydney, they have two super funds accordingly, with a $100,000 in each fund and are aged 50. They decided to setup a self managed super fund (SMSF) for more control and flexibility. They then roll over the total of $200,000 into their SMSF. They then calculate with their adviser that they can buy a property with super in Sydney for $550,000 using a deposit of $100,000 and the rest in borrowed funds or a loan of $450,000.  The other $100,000 is left for other investments and to provide some liquidity to the fund.

The table below shows a summary of the potential projected results over 15 years:

 

 Standard Super Fund

 Property in SMSF

 Current Balance

 $200,000

 $200,000  

 SMSF Loan

 $0  

 $450,000

 Total Assets

 $200,000

 $650,000

 Annual Return

5.5%

5.5%

 Gross Value 5 Years

 $261,391

 $849,523

 Gross Value 10 Years

 $341,628

 $1,110,293

 Gross Value 15 Years

 $446,495

 $1,451,109

 Net Value 15 years

 $551,806

 $1,001,109

Note: The above returns assume a 5.5% net rate of return compounded each year and does not take into consideration any additional fees, costs and taxes. The above example also excludes contributions made to super. These returns are only projections and no guarantee of future performance.

Depending on the level of their contributions to superannuation that Bob and Emma make before retirement, the SMSF loan could be completely paid out by the time they reach age 65. At this point the super fund (SMSF) could then take full custody of the Sydney property (from the custodian trust) without paying any capital gains tax or stamp duty. The rental income would continued to be paid to the SMSF and then once Bob and Emma retire they could draw a tax free income from the super fund as a pension.

The rental income would also enjoy a tax free environment inside the SMSF as long as the fund members have converted it to a pension. There is typically a NIL tax rate in the pension environment.

Of course you also need to take into consideration the cash flow costs of the SMSF loan, initial costs such as stamp duty and ongoing maintenance costs. On the basic numbers though, the concept of buying property in super could be very compelling for any diligent investor.

Whether or not buying a property with self managed super (SMSF) is the right strategy for you will depend on a whole host of factors, so always seek appropriate expert advice from your financial adviser and or a qualified accountant before making any decisions.

Need assistance? Make an enquiry about self managed superannuation here.

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By Greg Suefong who is a financial services consultant to private clients, advisers and accountants.

Download the free guide to buying property with your super here.