Buying property in Brisbane with a SMSF
If you’re considering buying residential property in Brisbane to take advantage of capital gain potential and strong rental yields, you might want to think about doing so through a self-managed super fund (SMSF). This option has become increasingly popular, with more and more Australians choosing to have greater control over their super – and to specifically take advantage of having property in a SMSF.
Your Property Hound’s Buyers Agent Service has helped many investors buy property in Brisbane through SMSFs and can provide assistance tailored to your individual needs.
Before you leap into buying property through a SMSF, there are a few things you need to consider:
- Is buying property through a SMSF right for your investment strategy?
- How do you set up a SMSF?
- How do you buy property through a SMSF?
Is buying property through a SMSF right for me?
There are several significant advantages of purchasing property through a SMSF (compared to buying a property in your own name), but managing your own super is a big decision and you need to know if a SMSF is the right fit for you.
SMSFs are best suited to people who:
- prefer to have greater control over their investments
- wish to minimise management fees charged by traditional super funds
- have the time and skills to manage super investments.
If you do decide to manage your own super, you decide where to invest your money. Investing directly in residential property is considered by many to be of lower risk compared to traditional super investments. This is particularly the case for investors who sustained significant losses through share market investments during the global financial crisis.
Other advantages of purchasing property in an SMSF include:
- Capital gains benefits – you pay no capital gains tax if the property is sold during the pension phase of the fund. If sold earlier, capital gains tax is charged, but at a low rate.
- Tax benefits – you can make cash contributions to the SMSF using ‘before tax’ dollars, which can lower your personal marginal tax rate from as high a 46.5% down to 15% and the contributions can then be used to make principal payments on the property. Effectively you can use pre-tax dollars to pay off the mortgage.
- Tax-free income – the rental income you receive is tax-free during the pension phase of the fund, and prior to the fund reaching pension phase rent is taxed at 15%.
- Asset protection.
It’s important to note that you or any of your family members can’t live in the property – you can only buy property for the sole purpose of building wealth for retirement. All aspects of SMSFs (including property investment) are tightly regulated and you need to be aware of the rules.
How do I set up a SMSF?
We recommend that you get professional help to set up a SMSF. Creating a SMSF can be a complicated process with significant legal, financial and taxation implications. The Australian Taxation Office provides some useful information to help you get started.
You should consider obtaining expert advice about the ongoing management of your fund.
How do I buy a property through my SMSF?
Buying property through your SMSF is a three step process.
Step 1. Obtain finance approval
Different rules apply when buying property in a SMSF compared to buying in your own name. When buying through an SMSF, you can expect that your bank will require:
- a larger deposit amount (normally 30%)
- enough funds to cover the deposit and purchase costs (e.g. stamp duty, buyer’s agent fees, conveyancing, building and pest inspections)
- proof that rental income and super contributions will cover all holding costs (i.e. loan payments, management fees, council rates, water charges, body corporate fees, insurance, maintenance).
You should also consider that interest rates are typically 1–2% higher than standard variable loans. Additionally, make sure you have sufficient funds available to cover any unexpected costs.
Your Property Hound’s Buyers Agent Service can help you perform a cash flow analysis to ensure that the SMSF has sufficient income to cover holding costs and payments off the principle according to the SMSFs investment strategy.
Step 2. Select your property
Selecting the right property is fundamentally important for the performance of the SMSF. Key selection factors include the capital gains potential, the rental yield of the property, your overall SMSF strategy, and the risk profile of the fund members. Independent advice about type and location of property is invaluable.
Some important points to consider:
- For funds seeking a long-term low risk investment, blue chip suburbs in major metropolitan centres may be better choices than regional markets, which are more speculative.
- Newer or renovated properties are likely to achieve higher rental yields and require less ongoing maintenance.
- Depreciation benefits are less important given lower tax rates (15%) compared to individual borrowing.
- The property must meet the ‘sole purpose test’ of only providing retirement benefits to fund members. Property cannot be acquired from a related party, must not be used for personal use, and cannot be rented or lived in by a fund members or related parties. (So no holiday homes and rental properties for the kids!)
- The nature of the property cannot be significantly changed through development, subdivision, re-zoning or refurbishment. Borrowed money cannot be used to fund improvements or renovations.
Your Property Hound’s Buyers Agent Service can find the right Brisbane property for your investment needs.
Step 3. Read the fine print
There are specific contract considerations when you buy property using a SMSF such as:
- purchase entity: the name on the contract is usually a trustee rather than then SMSF itself. There are significant consequences for getting this incorrect
- the finance clause is usually 21 days, which is typically longer than for a traditional purchase
- chattels cannot be included in the contract of sale – SMSF regulations only allow for the purchase of a single asset.
Your Property Hound’s Buyers Agent Service will work closely with your solicitor to ensure contracts are correctly executed for your Brisbane property purchase.