You’ve heard about these super-funded investment property purchases, but did you know that you could structure these purchases in different ways? You can choose a structure to suit your circumstances to reflect your financial goals and resources. The list below, by no means an exhaustive list, takes you through some of the best and most common structures for making a SMSF purchase.
1. Direct Purchase
If your SMSF can fund 100 % of the property purchase price and all associated costs, then a direct purchase may be for you. There are no loans to arrange and there is no gearing. For obvious reasons the required outlay will be much higher than other purchase methods, and so may limit the number, range, and types of properties you can purchase. Consequently, while you may not be diversifying as much as you could, you are making savings through minimising transaction and purchase costs with this simple structure.
2. Installment Warrant
Purchasing your investment property by using an installment warrant means the title to the property is own by a “bare” trust (i.e. “custodian” or property trust) with the SMSF while obtaining a limited recourse plan. The SMSF is responsible for expenses such as the loan repayments to the lender, and receives all the rental income. If the trust is properly set up then when the loan is fully repaid, the title is transferred to the SMSF without any capital gains tax or stamp duty. Technically, this structure allows the SMSF to acquire the asset through a series of installment payments. If the SMSF defaults on the loan, then the lender has recourse to the underlying asset only, and not the other assets held by the SMSF.
3. Tenants in Common
Your SMSF can own a fixed percentage in a property with other party/ies owning the remaining percentage in the property. The title of the property cannot be used as security for gearing, although the other party can use borrowings as long as the security for the loan is another property and not the property being purchased. Investors can share the costs, expenses, and income accordingly.
4. Joint Venture
When you undertake a joint venture, you have a formal agreement to pursue a commercial project and to share in the returns from the venture. An option for SMSFs is to enter into a joint venture with a family trust to purchase a block land and then to build a house on the land. Once the building is complete, title over the property would be transferred to the joint venture partners according to their initial input. The SMSF and the family trust would then be tenants in common.
The advantage of joint ventures for SMSFs is that they allow SMSFs to be involved in property development without actually formally carrying on the business of property development. However, the outcome must be shared by the joint venture partners, such as the rental income from the property rather than sale proceeds of the completed development.
Joint ventures are complex undertakings and professional advice should be obtained before parties make any commitments.
5. Unit Trust
SMSFs can also purchase property by buying units in a fixed or unit trust with other parties. The monies can then be pooled to purchase an investment property. Unit trusts can issue units with different types of rights on issues such as sharing of income, entitlements to capital profits or gains. This allows for greater flexibility and advantages for longer term investment strategies.
The target property cannot be used as security for borrowing, though the other investors, with the exception of the SMSF, can borrow to fund their share of the purchase so long as they do not use the property to be purchased as security for their loan. The exception to this rule applies where there is no party or a group of related investors who hold a controlling interest in the trust (more than 50%). In this situation, the unit trust can use the underlying property to secure their loan.