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SMSF holiday rental

Discussion in 'Superannuation, SMSF & Personal Insurance' started by coldspace, 2nd Jun, 2011.

  1. coldspace

    coldspace New Member

    Joined:
    2nd Jun, 2011
    Posts:
    2
    Location:
    Brisbane, Australia
    Hi question for superman or others in the know.

    I am looking at buying a good holiday rental in a popular location that has come onto the market and is really good buying even in these real estate times. It shows a good level of income and has a list of regular tenants and comes fully furnished.

    I have a SMSF just been setup and the funds from my old retail fund are been transfered over now. Approx 220K.

    The property is around 440K. Which is 60K under what others have sold for earlier this year the sellers have moved back overseas so need quick sale. Hence the reason i want to jump a conditional contract on it ASAP.

    I don't want to go down the path way of installment warrant loans as I would like to retain some capitl growth access on the property for myself in the future before retirement age. I am 35 so if I decide to sell it in say 8-10 years I want to access my share of the growth.

    So I am thinking of buying the property with my SMSF as "tenants in common" 50% share each. I will fund my share with my own money and the SMSF can fund its share outright with no debts.
    I understand you can do this and understand that I can not use the property for personal use. Now you know where I am heading a couple of questions,

    1:As I own half the property am I entitled to half the rental income and the SMSF gets the rest as "tenants in common"?

    2:How would holiday people pay the rent, will they have to put half into my account and the other half into the SMSF account or is there an easier way?

    3: When bills like power/rates etc come in do I pay half and the SMSF pays the other half or is there another way to do this?

    4: If in the future say 10 years, can I personally buy out the SMSF 50% share at fair market rates( have an independent valluation done) to have full control of the property?

    5: Can I run the bookings myself as well as use the local agent who was cool with this, as the regular tenants can call me direct to book in so as to save agent fees and the local agent can book it other times?

    I wish I could afford at the moment to either buy this outright in the SMSF or as an outright investment property in my own name but can't afford it but can afford a 50% share as tenant in common.

    Thanks guys for your views.
     
  2. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    Hi coldspace

    Welcome to the forum - I like your username - where is the inspiration from?

    Anyway - I wll go through and answer your questions one at a time - thanks for taking the effort to list them out - makes it easier!


    Yes. You personally will be entitled to a the % share of the rent of which you are the owner. You will will report your share of the income (and expenses) in your personal return.

    There is always an easier way. I suggest you set up a bank account that is in both names (i.e. you personally and the SMSF). Use this account as the main 'hub' for the property. Into this account will go all the rental income, and all expenses will be paid from this account.

    Periodically - say at least at the end of the year (but more often is OK too) you need to transfer the net cash amount across to the SMSF for its share and to you as the other & tenants in common owner (based on your ownership percentages).

    It may also be a good idea to keep a separate spreadsheet reconciliation. I have attached a simple spreadsheet to keep track of the month by month income and expenses relating to the property.

    If you really want to make your accountants life a breeze, run the joint account a bit like a real estate agent would run a their trust account - actually provide a statement to the SMSF each month or quarter which gives the rental income entitlement, share of expenses, net amount of cash paid to the SMSF, and the SMSFs share of any monies left over in the joint account.

    Doing this will save you a monza in fees - I can show you how if you like.

    I think I have answered the practicalities of this in the above response for #2. You also need to realise that as a portion will be owned by your SMSF, you will need to have all your expense documents available for review by the auditor of the SMSF.

    There is nothing stoping you paying all expenses on a personal credit card, and then having the joint SMSF account re-imburse you.

    Yes - and you are correct, you will need to get an independent valuation done. It cannot work the other way, so your SMSF cannot acquire your portion, but you can buy the SMSFs share at market value.

    Definitely. I have clients who do all their own bookings - it is sometimes a fair amount of work, however it normally works well - especially if you can get regular people who come back year on year.

    Some other bullet points to confirm / think about:

    • Remember the property can't be used a security - if you are borrowing to fund your 50% interest you must use external equity / security.
    • If you don't have a corporate trustee for your SMSF, you should definitely look at one - if there is another individual as trustee (spouse, family member etc), and if you no longer want that person to be trustee, then you may have a ****-fight on your hands.
    • Get the name of the contract right.
    • Ensure that all the costs for the purchase / settlement are 50/50 if you are buying as 50/50 tenants in common. Don't let one party pay more than 50%
    • You seem like a switched on guy - ensure you have done your research / due diligence on the property and that your projected cash flow stacks up and will meet your expectations.
    • Don't let family stay there! Don't stay there yourself!
    • Remember - the people staying there have the potential to do a lot more damage than may be covered by their security bond and the rent they have paid - I have seen clients have houses trashed in a few short days. Get a good agent / good systems in place to ensure that if someone trashes the place, you have good footing to take them to small claims to cover the costs / repairs.
    • You say you want to access your share of the capital growth. There are ways for you to utilise a member financed limited recourse loan (i.e. the new name for an instalment warrant) to achieve this outcome while keeping the capital gain in the SMSF with a maximum of 10% tax. It is a little too complex to explain in this post however.
    • I can recommend a good SMSF auditor in Brisbane (just down the road from my office) who can also give you any guidance in how to correctly adminster it / run the accounts and record keeping (we had an issue with another of my newly acquired SMSF clients who had a tenants in common property who was running the accounts totally wrong - hence the above responses are fresh in my mind :rolleyes: ).


    Some people may have a negative viewpoint on your strategy, and I can understand why - many SMSF investors stuff up these arrangements so bad that they cause themselves all kinds of compliance issues which can get their SMSF made non-compliant.

    In many cases part of the blame must sit with the advisers / accountants as it is their responsibility to drill the do's and dont's into their clients right from the start.

    I hope the above answers you questions. If you have any more, please let me know.

    SM :cool:
     

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  3. coldspace

    coldspace New Member

    Joined:
    2nd Jun, 2011
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    Location:
    Brisbane, Australia
    Thanks very much mate. I sorta thought that was what I could do.

    Its a great buy ATM and I don't want to let it slip buy. I will look at insurance coverage as well for damage etc.

    The agent has a good rep, but the current owners are happy to provide me with a dozen or so once or twice yearly regulars, so want to be able to book these in without agent fees to maximise my return.

    Coldspace, well I use it on many other forums, only just found this one today.

    Here's a legal point I can see that could possibly be interpreted both ways not that I want to find out, I wonder if the tax office has any rulings on it, not that I want to test it with them :rolleyes:, in the eyes of the law on property with tenats in common, each "tenant" can not restrict access to the other "tenants" of the property. So theroretically you could use the property as well as the SMSF could rent it out as each rule clashes with each other ;). but I recon mister tax man would fight all the worlds wars to beat that,
    I think I will just get maximum returns on the place at Chrissy/easter and rent the unit up the road,lol.
     
    Last edited by a moderator: 3rd Jun, 2011
  4. Steve H

    Steve H New Member

    Joined:
    19th Oct, 2011
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    3
    Location:
    Gladstone
    Hi great post and response guys! - looking to do a similar thing to coldspace ie. buy IO property 50/50 with SMSF but not sure how to go about the financing. Want to organise to borrow the whole 100% then pay it down by equal individual and SMSF contributions.

    Question: Can I Borrow 95% in own name then set up a loan to my SMSF for the following 45%? Not sure how I would get on since the SMSF would hold the property in a trust not sure banks would like that to much. I do have other property to put up as security but would be a least preferred option.

    If anyone has any thoughts on this would like to hear then.

    Thanks
    Steve:confused:
     
  5. MikeF

    MikeF Member

    Joined:
    1st Feb, 2008
    Posts:
    12
    Location:
    Sydney, NSW
    Hi Steve

    Nothing stoping you borrowing in your own name other than providing a lender with serviceability and seperate security position out side of any SMSF.

    To do this you would need equity in property outside the SMSF. If this is all good then yes you may be able to raise funds so that you can onlend to the SMSF so that it can then purchase the desired asset.

    The above is a simplified scenario however the legalities and other issues that need to be covered are lengthy and require specialised financial, accounting & legal advice.

    The laws around SMSF's borrowing funds to purchase an asset are complex and not for those without proper support and advice.
     
  6. Steve H

    Steve H New Member

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    19th Oct, 2011
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    Location:
    Gladstone
    Thanks Mike. I am fairly new to SMSF's and need to source a good advisor.

    The only issue for me is that I dont have a great deal of equity due to recent IP purchases and only about 100k in super hence was looking to source a lender that would provide me the 95k LVR then onlend to super fund. The super fund would make its payment by employer contribution and would use some of the 100k as the deposit. My long term goal is to have at least 2 investment properties in fund.

    If I was looking at a IP worth 450k and has a 45k deposit (using existing equity) would a bank lend the 405k to me only using the property that is joint owned by myself and SMSF and held in SMSF. I do unstand that I cant use this property as future security since its in the SMSF.

    Also if this is possible will all lenders to it or are there a select few - if so can you email me who they are.
     
  7. MikeF

    MikeF Member

    Joined:
    1st Feb, 2008
    Posts:
    12
    Location:
    Sydney, NSW
    Hi Steve

    Firstly you can't own property jointly with your SMSF and have borrowings against it. This is prohibited by the SIS Act under the Limited Recourse Borrowing Arrangements legislation.

    If you borrow in your own name and on lend to your SMSF you need to be able to do so based soley on your personal borrowing capacity and available security outside of the SMSF. If this is possible then you could set up a member loan to your SMSF bearing in mind that you would still need to establish a bare trust to hold the SMSF asset.

    If your looking to do a standard SMSF borrowing then the maximum LVR for residential property is 80%.

    SMSF borrowing capacity is then calculated using your employer contributions and the rental from the property. As a guide if your looking to purchase property valued at $450K then max lend would be $360K. Typically to borrow this amount total annual income (rent/contributions) to the fund would need to be a round the $45K

    Hope this helps
     
  8. Steve H

    Steve H New Member

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    19th Oct, 2011
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    Location:
    Gladstone
    Thanks Mike that cleared up a few things - will now look to get hold of a good SMSF advisor to sort out the rest.