SMSF strategy residential property

Discussion in 'Superannuation, SMSF & Personal Insurance' started by drfuzzy, 11th Sep, 2016.

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  1. drfuzzy

    drfuzzy Well-Known Member

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    Hi all,

    I'm late 30s and have about $240k in super with a retail fund. I have significant assets outside of super and an income circa $200k and am happy to take risk with my super.

    My plan was to establish an SMSF and purchase a house circa $800k-$900k in a location that will ultimately gentrify and borrow up to $700k to do it. The house would be mostly for land value and the yield would not be great, however my income would cover the shortfall from the rent. I have been contributing the maximum allowed pre-tax to my super for several years.

    The longer term goal would be to have land (with house) that has long term development potential, and sell for land value in 30 years time. In the short term I could do a cosmetic renovation on the property to improve the yield.

    Questions:
    1) Is this achievable?
    2) Can I use the super contributions from my job to help service the loan? Or is this not allowed?
    3) Are there any obvious pitfalls with this strategy? I have already considered concentration risk, inability to develop within SMSF using borrowed funds, high leverage.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    1. Sort of. Your personal income cannot pay the SMSF loan directly. Your fund would pay the loan out of its income and cash. Its income would be rent and contributions and other earnings.

    2. Not unless you contribute to the fund first.

    3. 70% LVR generally. Fund will also need some liquid cash of around 10% after the loan.
     
  3. 158

    158 Well-Known Member

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    SMSF....resi property......Meh!

    Why not look to a Commercial purchase for SMSF? Rent covers all the P&I payments to pay the property off in 10-15 years and all outgoing paid by the tenant. Long terms locked in (but risk longer vacancy if they move out) ensure constant income and in 30 years you will have payments available for 2-3 more similar sized properties. Or diversify into direct shares or LIC/ETF for income.

    @Terryw - interested in your response to #2? Super contributions (SGC) from an employer will be included in servicing calculations surely?

    pinkboy
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes . Employer contributions are income to the fund and will count towards serviceability.
     
  5. AnthonyK

    AnthonyK Active Member

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  6. AnthonyK

    AnthonyK Active Member

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    Hello Dr Fuzzy and All
    The best way to do this is with what I call a "Transitional Trust" arrangement which can join with your SMSF in owning the property. As you know there many prohibitions in selling most assets to your SMSF but there are few that prevent you buying assets FROM your SMSF. So using the correct trust structures over time you can gradually build your equity in the property until it is 5% or less and then you can live in it paying a mini lease.
    AK