Investors can now use earnings accrued in their super fund to buy real estate through self-managed super funds (SMSFs). Although there are some significant benefits to SMSF investment property that might help you save more for retirement, you should be aware of the limitations on how you can use your assets in SMSF real estate. The option to use the money that has amassed in your SMSF to purchase investment properties is a significant benefit of SMSFs.
You can completely buy an investment property if you have the money in your SMSF, which will generate a stream of rental income that will help your fund before and after you retire. Here are some tips and suggestions to help you get started with SMSF investment property strategy.
- Take into account utilising a Structured Recourse Borrowing Arrangement.
You have several options to buy real estate with an SMSF. The first stage is utilising the money from the fund to make the acquisition. This is not an option for people who have not saved for long.
Creating an LRBA is one such choice. This protects you if the investment is a failure. The lender’s only chance to recoup any lost money from the property is if something goes incorrect. They cannot retrieve super fund assets unconnected to the investment property. However, this implies that the lender does not need a personal guarantee, which many do.
- Control your financial flow:
The opportunity to invest in a range of assets, such as real estate and commercial space, is one of an SMSF’s benefits. Although these assets might help you increase your long-term wealth, they could be problematic if your fund wants to pay benefits out to one of its members right away (e.g., due to disability or death). In this situation.
A fantastic method to escape this trap is to have some of your SMSF funds placed in liquid assets, allowing easy access to your money in case of need.
- Look beyond the big giants:
You may have difficulty locating a lender willing to provide an LRBA. This is a result of the decision made by the four leading banks to forego loaning to SMSF funds. They consider it appropriate because SMSF borrowing barely makes up 0.18% of market borrowing. They do not feel this is a viable industry because of the considerable compliance effort necessary on their end.
Consequently, you will need to go beyond the primary lenders if you want to derive the money you need. The good news is that smaller lenders are easily accessible and can provide you with access to money. They typically want a 20% down payment, while some may ask for a 30% down payment.
- Recognize the regulations for renovation:
One of the main arguments put up by many consultants for why you shouldn’t purchase real estate using an SMSF is the alleged inability to refurbish. If you follow the regulations, you can remodel and increase the value. The crucial point is that you cannot create these value enhancements with borrowed funds.
However, there are situations when borrowing money is necessary. For example, you may use borrowed money to maintain the property. It could be feasible to use it to replace some assets as well. You don’t necessarily have to employ SMSF money in these situations as long as there is a practical objective.
- Tax benefits during and after retirement:
The tax advantages of purchasing a home through your SMSF begin far before retirement. Once you’ve owned the property for more than a year, the capital gains tax rate drops to only 10%. Also, your SMSF-owned property’s rental income is usually subject to a low 15% tax rate.
To determine if creating an SMSF and engaging in such a plan is appropriate for their circumstances, people should seek guidance. As you can see, using an SMSF to make real estate investments is a good idea.