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How can I buy property inside my SMSF?

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I want to buy a property inside my self-managed super fund. I am 48 and have, along with my wife, about $500,000 in our fund. I want to buy a $500,000 home unit in Melbourne and I want to borrow to do so and do it up to improve the value. Do you think it is a good idea and are there some traps I should be aware of?

You’re in a growing number of people who want to use a SMSF to put what we call ‘direct property’ into their super funds. I personally like the idea provided you buy an asset that has potential for both good income or rent and good capital gain. If these two things happen, then your property is like a share and does all of the things the Australian Taxation Office (ATO) wants to happen inside a SMSF.

Obviously I don’t think you should put all of your money into property and so you will need to borrow. A bank might lend your fund, not you, 80 per cent of the $500,000 and so you would have to put $100,000 in but you could stump up $250,000 and borrow the rest, which would mean you would have $250,000 left to have in shares, fixed deposits, bonds and cash. It would mean you have a nice mix of assets in your portfolio but you have to do your homework.

Your SMSF will need to have a corporate trustee deed, which banks want to lend to in what they call limited recourse borrowing arrangements. It means if they had to take the property back, they couldn’t touch your other super assets.

Now generally, the tax office is letting trustees of SMSFs renovate to improve a property but you will have to use the super fund’s money – you can’t use borrowed funds. However, you can use borrowed funds for repairs to bring a house back to working order, which could reduce the overall amount you will need for bettering the property.

I think getting some legal advice or dealing with an adviser who is licensed to deal with property is a good idea. Also mortgage brokers say the process of getting the loan documents signed, sealed and delivered is quite challenging, especially if you buy at auction and that’s why I say do your homework.

I would create a list of crucial things that have to be done to make the process streamlined and that list would come from talking to experts from the bank, to lawyers, to mortgage brokers and advisers. I would make sure you understand how you pay a deposit at an auction because it’s not as simple as writing a cheque. Remember it will be owned by the SMSF and held in a special trust and this trust has to be in place before you bid and buy at auction. Good luck with it.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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.

Published on: Wednesday, February 22, 2012

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