In Australia there is a growing trend towards opening Self Managed Super Funds, many investors are doing so specifically to invest in Australia’s strong residential real estate market. While this appears to be a great strategy many investors take this step before doing their homework, there are a few things the be aware of;
- It is essential to make sure any property investment meets your objectives, ie do you want capital growth or income? Can your fund afford to negatively gear into property?
- Does the purchase meet the sole purpose test? (is the sole purpose of the purchase to provide for retirement benefits to members?
- Does the funds investment strategy allow for property investment?
- You cannot buy property from yourself except in rare circumstances
- You cannot use the property yourself except if the property is real estate that is rented by your business on “Arms Length” terms
The next big question (and stumbling block) is borrowing in your self managed super fund, there are quite a few things to be are of;
- Self Managed Super Funds can borrow to invest but LVRs are generally lower than investing outside super (60 – 80%)
- Fees and interest rates are generally higher than borrowing outside super
- Banks are quite strict when assessing properties and will only accept properties of high quality
- You need to ensure that if the property is negatively geared there is enough cashflow in the super fund to cover repayments
For people who prefer property over shares using a self managed super fund to buy residential property can be a good option but please do your homework carefully and ensure you have a clear strategy before committing to a purchase.