The decision to start a self-managed super fund (SMSF) is a major step towards taking control over your financial future. As more and more Australians turn to SMSFs as a means of taking greater control of their retirement savings, many are facing a common question – whether to use their SMSF to invest in new or existing (established) properties.
Under the rules laid down by the Australian Taxation Office (ATO), SMSFs are allowed to invest in both residential and commercial property. This has opened up greater investment possibilities for private investors, allowing them to amplify their borrowing capacity through a mechanism called limited recourse borrowing arrangement (LRBA). This means, with an LRBA in place, SMSFs can take out loans to invest in property, provided the property acquired is held in trust and meets certain criteria set by the ATO.
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Once you establish an SMSF you become a trustee, either as an individual or in the company of other members. This means you must act in the best interests of your SMSF members and comply with the relevant SMSF rules and regulations. As an SMSF trustee, you can buy property under your fund’s name which will be a part of its asset pool.
If the SMSF has enough funds, it can buy a property outright without borrowing. However, using leverage is often beneficial when seeking to increase the fund’s assets and achieve higher investment returns.
When it comes to investing in property through your SMSF, choosing between new and existing properties is a crucial decision that can significantly impact your investment strategy. New properties often come with benefits such as lower maintenance costs, modern amenities, and potential tax incentives, like depreciation allowances. These advantages can make them an attractive option for investors looking for minimal upkeep and enhanced rental appeal. On the other hand, existing (established) properties might offer the prospect of a quicker rental income stream if they are already tenanted and can often be found in established locations with proven demand.
One of the key benefits of buying a new property using your SMSF is the potential for depreciation. New properties allow you to claim depreciation on both the building and fixtures, significantly lowering taxable income and enhancing your fund’s cash flow. This can make a substantial difference when comparing new to existing properties.
It’s important to note that SMSFs cannot purchase properties with two-part contracts, such as house-and-land packages, but they can invest in turnkey housing packages, apartments, townhouses, and other single-contract properties.
Additionally, new properties tend to require less maintenance than older ones, reducing ongoing costs and minimising the time spent on upkeep. An important factor for property investors, property maintenance can significantly impact the overall profitability of an investment. Their modern amenities and features can also attract higher rental returns, further boosting the investment’s profitability.
One of the more commonly cited downsides of purchasing new properties is the risk of oversupply in certain areas, leading to decreased demand and rental income. However, this is becoming less of a concern in the current undersupplied market. What’s more important now is whether the property is in the right location, in good condition, and likely to attract tenants willing to pay market value rent. As always, access to the right investor resources and thorough research remains crucial to making a successful investment decision.
When considering buying an existing property through your SMSF, one of the major advantages is the established market value. The track record of sales data for an existing property can help investors determine the potential for capital growth and rental returns. Additionally, existing properties often offer more flexibility in terms of location, as they are not limited to new development areas.
However, older properties may require more maintenance and ongoing costs compared to new properties. Investors should also carefully consider any potential renovation or refurbishment costs that may be needed to increase the property’s rental appeal.
Investing in property through your SMSF requires strict compliance with the rules and regulations set by the Australian Taxation Office (ATO).
The rules set out by the ATO include:
Failure to comply can result in severe penalties, including disqualification as a trustee.
Some important considerations to keep in mind when purchasing property through an SMSF include ensuring that the property is bought for investment purposes only, not for personal use. The ATO also has restrictions on who you can rent the property to, as well as limits on borrowing within your SMSF to finance a property
When considering property investment through an SMSF, it’s essential to weigh the costs associated with buying new versus existing properties. New properties often come with higher purchase prices due to premiums on modern amenities and construction standards. However, they could present lower maintenance costs initially, as everything is new, and there might be less need for immediate repairs or renovations. In contrast, existing properties might be less expensive upfront but could require significant expenditures over time due to maintenance or refurbishment needs to attract tenants or increase value.
When it comes to investing through your SMSF, it’s all about playing the long game. You want a steady rental yield to support your future retirement needs, and the property’s appreciation over time will boost the overall value of your SMSF’s assets. Plus, with superannuation rules in play, you’ll benefit from tax perks like income tax concessions and reduced capital gains tax. New properties, with their modern features and lower maintenance costs, often present a more predictable and hassle-free option, helping you stay on track for a financially rewarding future. But remember, things like interest rates, inflation, and market trends can affect property values and rental income, so doing your research is key.
Ironfish’s SMSF-ready properties allow you to choose the best investment option for your SMSF’s needs. Our experienced property strategists can help you navigate the costs and benefits of each type of property, as well as provide the insights into the current market and potential rental yields you need to create wealth through property.
Want to find out how you could build your property portfolio? Our property strategists are here to help.