SMSF buying property jointly

Hi all,

This is my first post after reading alot of excellent articles on InvestEd.

I am looking at setting up a SMSF for myself and my wife. The main purpose is that i would like to take control of my super, including investing in selected shares and property.

I am looking at purchasing an investment property jointly with parents for around $800K. The sturcture is yet to be determined (i.e. trust, company, or as individuals) as there are questions I have on whether I can utilise the SMSF's as part of teh purchase.
The property is on the outskirts on Sydney and has development potential over time. There will be rental return from property

What I would really like to do is setup the SMSF to purchase part of the property and in turn reduce my personal liability and funds that i need to borrow.
If this can be done, my parents (who already have a SMSF) will also do the same.
Ideally each SMSF would fund 20% and my parents and I will fund 30% each.
I am assuming that a trust can be setup and that the different parties can own units in the trust?
Does this sound right? or are there other options?

Regards
Peza

 

Welcome Peza

Will you need to borrow to fund the purchase?

This will impact on what you can do.

SM

 

Hi Superman,

Thanks for your reply.

The SMSF will put in as much capital as possible without a taking out a loan preferably. Depending on the final purchase price, this would mean that the SMSF will own anywhere between 15-25%.
I intend to take out a loan myself (under my name and my wife's name) on the remaining amount to make up my 50% of the purchase price.


Thanks for your help

Peza

 

Hi

If you intend to take out a loan to purchase the property, remember that the property you purchase cannot be used as security for the loan.

Jenni

 

Peza

I think you need to think long and hard about the whole structure
so you'll need a specialist to help you structure it right.

The question one may ask is why would your parent's SMSF contribute to this. Are your parents near retirement and will they be getting money to live on from the property or will they only share on the liabilities?

Is such a move in line with their SMSF's investment strategy and have you considered the sole purpose test?

 

Peza,

Jenni has made the key point - if an SMSF invests directly in a property, there cannot be a mortgage registered against the title of that property. It is not possible (to my knowledge) for a mortgage to be registered partially against a title.

You need to answer the following question: Will the loan(s) be secured against the target property?

(The following assumes 'YES'):

This means it is not possible to structure the purchase in the way you have suggested.

Utilising a geared unit trust structure which the SMSF would invest into will also be unavailable because related parties are controlling more than 50%

If you are super keen to jump into bed with the parents, then the only way to do so would be to utilise their SMSF. This would mean you and your wife would have to become members of the parents SMSF, transfer your super to their Fund and use the combined amount to purchase the target property using a debt trust / instalment warrant.

You can use direct funding from the bank or borrow using any available equity you have (or a combination of both).

Sounds great in theory right?

However there are a huge number of issues, here is a selection:

1. SMSFs can only have 4 members - need to ensure there is currently only mum and dad in their fund (no other siblings etc)
2. One big lumpy asset - how will this impact the cash flow? Are the parents going to be drawing a pension?
3. You say that the property has future development potential - the instalment structure doesn't enable additional borrowings to be made against the property (i.e. no re-draws) - if you are planning on developing it yourself - will you have the ability to fund any development?
4. Diversification - enough said!
5. What happens when your parents pass away our become incapacitated? As the remaining trustees you are your wife will have control - but how would it impact on your parents estate planning (remember a Will doesn't cover super)?
6. Is your parents trust deed updated to enable it to borrowing and invest in an instalment warrant structure? It will also need a corporate trustee.

It is possible to use your super - but are the costs worth it?

Looking at non SMSF structures, I would probably use a unit trust (with a corporate trustee) as the fixed trust will enable some negative gearing benefits to be accessed (i.e. interest deductible against distributions). Just ensure the unit trust doesn't have loans - only issued units with the loans in the name of you and/or your wife.

The loan can be in a different name to where the mortgage is secured (I believe 3rd party security is the term).

Just remember unless there is an unrelated party involved (i.e. related parties don't control MORE than 50%) then an SMSF cannot invest into that trust.

Finally - are you really sure you want invest with your parents? If things go south, it could spell big trouble within the family!

I hope my response triggers a lot more questions and provides some food for thought.

SM

 

Borrowing in SMSF

Peza,

If after Superman's great reponse you still have an appetite for this project you will find your only option within super is through an installment warrant. You will need about 30% plus costs as a deposit against the value of the property for a bank to lend you the balance (on current bank requirements for residential property in superfunds)). This can be provided by all the members of one fund . You and your parents would therefore have to use the same fund. Prudent management would also suggest you have plenty of extra liquid assets in the fund as well for the unexpected.

The control issue raised by Superman can be resolved by altering the trust deed to ensure membership of the fund remains after death via the LPR and also altering the voting power to be based on account balance and not numbers.

As Superman said. Get an expert opinion as the penalties for getting this one wrong will be huge.

Good luck
Jason
Brisbane Financial Planners | Financial Advice | Financial Advisor