The long term economic crises that have eaten away at people's savings have made real estate seem much more valuable than before as a tool for planning for a comfortable retirement. As a matter of fact, an increasing number of people are investing in property through their superannuation funds. It has not always been easy to invest in property using accumulated superannuation money since the costs associated were very high. However, there have been many changes in laws that simplify the process of how to buy property with super funds.
Most people prefer to use an SMSF (self managed super fund) to invest in property and plan for their retirement years since this method allows them a simple way to
• Save on income tax
• Eliminate paying capital gains tax in the case of an investment property
Many small business owners also use this investment method to get the maximum benefit from owning property. They use their superannuation fund to buy commercial property to run their business from and then rent the property to the business, thereby reducing their operating costs. It is important to keep in mind, however, that the rental rates should be in keeping with existing rates in the market at that time.
Important point to note: When a residential property is purchased with an SMSF, the trustees or any other member of the fund is not allowed to live in the property. This also applies to properties which have been purchased as holiday homes. There are strict penalties for this.
Since the rules relating superannuation now allow people to borrow funds inside of an SMSF, increasing numbers of people buy property using this route. Keep in mind the following information regarding SMSFs:
– It is possible to buy not just residential and commercial properties using an SMSF but also industrial properties. One can also buy either listed or unlisted property using this route.
– This is a good way to buy property without having to deplete one's bank account or reduce ones disposable income. Banks are generally willing to put up 80% of the value of a residential property. When it comes to commercial property, they will lend a maximum of 70%.
– The money will be borrowed through a Bare Trust which will keep the legal title to the property. Even so, the beneficial ownership of the property in question lies with the SMSF. This means that any profits such as capital gains and rental income will accrue to the SMSF.
– The potential benefits of investing through this route are very high but the risks are also very great since the lender can take control of the property in case the SMSF is unable to pay back the loan for any reason. Therefore, it is very important to take measures to protect the investment. For instance, the buyer should take out an insurance policy to be able to avoid forcible sale of the property.
– The members and trustees of the SMSF are one and the same. In other words, the members are expected to run the fund to their own advantage.
– There are many laws that govern the running of these funds and compliance with them is absolutely necessary as per the law.
– Certain concessions in stamp duty are available to those people buying property using this route. However, the exact amount of concession varies according to the state in which the fund is formed. It is necessary to study this factor before making a final decision on investing in property.
Even though many people are eager to buy investment property in superannuation, they do not realize until later on that the costs of making mistakes can be quite severe. Also, the many regulations and rules that govern these transactions can be quite confusing. Therefore, it is always a good idea to get professional help, especially when buying overseas property in superannuation because of the additional risk factors.
If you wish to find out how to buy property with super funds then the following information will be of great use to you:
1. Start by establishing an SMSF, preferably by getting help from an experienced and qualified financial consultant. There is a lot of paperwork that generally needs to be done and the consultant will do all the work necessary to set up bank accounts, trust deeds etc. A special bare trust known as a Custodian or Property Trust will have to be established.
2. Once your SMSF is in place, you need to transfer your superannuation funds into it. You can start such a fund singly or with others. For instance, you may decide to pool your superannuation funds with those of your spouse in order to buy a property jointly.
3. You should then apply to a bank of your choice to get a loan pre-approval based upon the total money you are willing to spend on the investment. The bank will go through its regular process for loan approval and will require certain documents in order to check whether they are in order.
4. You can start searching for a suitable property once you have a loan approval in hand. You have to follow normal processes for selecting the property and closing the deal.
5. The legal title to the property in question will be mortgaged to the lender who also earns interest as per the loan agreement.
6. As the manager of a superannuation fund, you need to be absolutely scrupulous in keeping the accounts of the funds separate from your personal finances. One of the legal requirements of managing such a fund is that you have to manage it in the right way. For instance, you are required to maintain all necessary records and even get the fund audited annually.
Since there are many rules and regulations that govern the use of SMSFs to buy property and there are many penalties for non-compliance; even small deviations from the rule are punished; it is best to make such an investment only after getting professional help. If used properly, this investment route can certainly result in good returns.