Here Are 5 Things to Know Before the Proposed 45-Day Deadline.
The Labor Government has reached an agreement with the Greens to introduce new legislation affecting SMSF residential property investment. The changes come amid growing concern over the way some online property spruikers have been promoting buying residential property through a self-managed super fund (SMSF) as a “budget loophole” to access the housing market.
The increased promotion of SMSF property purchases has attracted significant public and political attention, prompting the Greens to push for tighter rules during negotiations with Labor. As part of the agreement, Labor has incorporated these measures into the proposed superannuation legislation, which aims to address concerns about the use of SMSFs for residential property investment.
The proposed changes could have important implications for Australians considering buying residential property through an SMSF, making it essential for investors, trustees, and finance professionals to understand how the new SMSF property rules may affect future investment strategies. Commercial property has been left untouched, so buying this asset is still a viable option, especially for many business owners.
But this might be a blessing in disguise for the everyday Australian.
You might be thinking you need to act fast because a buyer’s advocate or a finance broker has “freed” up spots to help you buy a residential investment property before the “budget loophole” closes. Neither professional is licensed to advise a customer on the suitability of an SMSF structure. Take the pressure off and consider, is this something you genuinely saw benefit you or are you acting on the fear of missing out (FOMO).
Here are five things you need to think about.
1) Pause and speak to a Financial Planner first
A Financial Planner is the only professional licensed to provide you with financial advice. Whilst it’s not mandatory to speak to a Financial Planner, this is a large investment decision that influences your retirement. Financial Planners have the tools to help you map your goals and have the model the impact of buying a property via your SMSF.
Pause and consider is this the right strategy for me? Will this purchase help me achieve my retirement goals?
When establishing an SMSF, trustees must ensure the fund satisfies the sole purpose test as per the SIS Act.
You don’t want to regret a poor investment when you should be relaxing and enjoying retirement.
2) Have you done the numbers?
A specialist finance broker like SMSF Mecca is licensed to provide the credit advice. What does this mean? As specialists we will compare your options in market and assess your borrowing power and ensure the product and lender recommended is in line with your goals, loan preferences, timeframe and financial situation.
In a lot of cases, we often see many Australian’s not qualify.
To successfully be approved for a LRBA loan at a purchase price of $800,000 you need to have:
- Deposit of $200,000 plus stamp duty and setup costs
- Assuming a two-member fund, each member would have to contributing $30,000 each per annum
- Rental income of $24,000 which is 3% yield
So, if you don’t meet these high level criteria, you may need to increase your deposit to reduce repayments and thereby ensuring the income in the fund will service the debt.
Key things that influence your loan amount are:
- Your member contributions – Typically your super guaranteed contributions
- Rental income – Most lenders assess rental income at 80% to account for landlord outgoings and reduce vacancy risk.
- Superfund balance – how much you can contribute towards the purchase price
- Assessment rates – This is the rate the lender assess your loan at which ranges from 2-2.5% above the quoted rate. This is to stress test your ability to service the debt should rates rise or income drops.
3) Are you aware of the risks?
There are several risks that you should be across like concertation risk and lack of diversification in your fund as a core part will be invested into one asset to do the heavy lifting. As members of the fund, you will be required to provide an individual guarantee which exposes your assets outside of super should you default on the loan.
This doesn’t mean don’t buy via your SMSF. It just means you need to aware of the risks and understand what you’re getting yourself into. That way you can make an informed decision.
4) Are you across the limitations of an Limited Recourse Borrowing Arrangement (LRBA)?
SMSF Lending also referred to as LRBA’s, have some big restrictions when compared to your typical home loan. Firstly, the recourse to the lender is limited to the property. This means in the event of default the lender can only sell the property and not touch other assets in the super fund. However, lenders will also ask for an individual guarantee from the members of the SMSF.
5) Are the members on the same timeframe of retirement
Before establishing a SMSF, consider the retirement plans of each member. When will each of you want to retire? Why is this important? Well for most people, the funds assets will shift from an industry or retail super fund which is liquid vs an asset that is not as easy to liquidate. What happens if one member wants to retire prior to the other member?
This is why speaking with a Financial Planner first is incredibly important.
While we may not agree with the new restrictions on residential property purchased through a self-managed super fund (SMSF), we understand that Australians want greater control over their retirement savings. If you’re considering buying property through an SMSF, don’t let fear of missing out (FOMO) or recent legislative changes rush your decision. Every SMSF strategy should be assessed against your long-term retirement goals, cash flow, tax position, and lending capacity.
The good news is that the legislation does not impact commercial property in an SMSF. For many investors and business owners, commercial property can offer higher rental yields, longer lease terms, stronger cash flow, and the ability to own your business premises through your super fund, making it a compelling alternative to residential property.
Whether you’re exploring SMSF residential lending or commercial property investment through an SMSF, the right strategy depends on your individual circumstances. Speak with experienced SMSF lending specialists who will help you understand your options and make an informed decision. Book a discovery call with the Mecca Finance team to explore the strategy that’s right for you.