I Bought a Unit with my Super Fund13-Nov-2013
1. Set up your DIY super fund and get comfortable with it
We set up our own SMSF in 2005 after discovering we had our super sitting in seven different accounts. It took me nine months, endless letters to the different funds, a steely resolve and about $2000 in accounting set up fees to pool it all into one account. The only way I survived was to repeat to myself the mantra that it was a marathon, not a sprint. And it was OUR money. It was a good precursor to buying property in the super fund which is also not a fast, nor easy, process.
2. Know what you can and can't do
Broken down into its most basic elements, the rules around managing your own superannuation fund are this: 1) You need a written plan about what you want to do with your funds which is a sensible and suitable for your investment strategy and 2) If you will gain an immediate personal benefit from the investment other than the money it returns to you, you probably can't do it. To this end, buying an apartment with your super fund for your kids to live in is not okay. Nor is it wise to put all your eggs in one basket - ie: investing every dollar of your super in property. And if you are in a super fund with another member, you need them to sign off on any investments you make - even if they are your spouse. And this will all be audited. So you can't go out one Saturday and come home with a new property "for the super fund" - unless this is what you have agreed beforehand.
3. Crunch your numbers
I have my head in property data on a daily basis and had been monitoring a handful of suburbs that I thought had potential for a super investment for about six months. My criteria was to buy in an area that had good transport, at under $300,000 and get a positive return. That meant I was looking for an area that had average weekly rents over $320 a week. Lakemba was on the train line, about 20 minutes from Sydney and met the criteria.
4. Don't invest anywhere you don't know
Taking Andrew Winter's advice, we spent a couple of weekends hanging out in Lakemba. One Saturday we spent wandering Haldon St, checked out the local real estate windows and got a feel for where the schools and transport were. On the second visit, we went to some open for inspections, checked out the property stock that was on the market and the prices being asked to work out what we could afford with our budget and the best streets to buy in. These visits revealed Lakemba was a real melting pot of cultures. It had a high Muslim population, great food and while apartment living dominated, these were mainly rented by families, especially new migrants. We realised now we were looking for a 1960s-70s brick apartment with at least two bedrooms and should expect leases that ran for about six months to one year.
5. Avoid negative gearing
Superannuation is taxed at a lower rate than income tax, so there is little benefit to negative gearing a property bought with a DIY super fund. Doing so can also potentially be in breach of your approved investment strategy. The bigger the deposit as a proportion of the value of the property, the better the return is likely to be, which also lowers your risk. Our share portfolio - like everyone else's - had taken a bath during the GFC, so I was reluctant to liquidate shares to get the cash. So while I was researching and watching the market, we simply saved and waited until we could put down enough money, without wiping out our entire superannuation cash reserves.
6. Have your structure set up before you buy
If you are going to need any kind of finance as part of your superannuation property purchase, you need to have this set up BEFORE you put in any kind of an offer on a property. The complicated nature of DIY Super Property Investment, means the title of the property is owned by a trustee on behalf of the SMSF. The SMSF is ultimately responsible for loan payments, but the property title is held by a bare trust (or custodian trust) until the loan is fully repaid. The bare trust and its corporate trustee are completely separate from your DIY Super Trust, which should be the recipient of the rent but should not borrow any money itself. (are you still with me? Hint: don't try this at home. This is real accountant territory).
If the deeds on your super fund allow, you can use an existing personal finance facility to lend money to the bear trust. But it needs to be in a separate account. The structure is designed to protect the other assets in your super fund. If for some reason, the investment falls over (ie: because you both lose your jobs and the rent fails to cover the repayments) the only recourse the bank has is to liquidate the property or go after the guarantors (which is you). But the remaining assets within the SMSF can't be touched. Setting this up can take several weeks, and will cost around $3000 with your accountant. Another hint: the right company names need to be on the documentation at time of settlement or you risk paying additional stamp duty to transfer the title if you get it wrong. You should therefore use a solicitor with expertise in this area. It may cost a little more but it could save you a lot later.
7. Buy your property
With everything in order, I woke up one Saturday morning, realised the market was on the move and I needed to act. That weekend, I went to six open for inspections for properties that met my criteria and were in my price bracket. The second property ticked all my boxes. It was neat and tidy, had recently been renovated, and had a car space. Nothing needed to be done before tenants could move in. Others I looked at were slightly larger, but required work to make presentable and not enough of a price discount to warrant the work. Before each open, I sat out the front with my iPad on my bank's loan calculator typing in the price and comparing the repayments to my budget and the rent I could expect. I wrote everything down and made sure I compared each property the same way. This was informative. It showed me that the bigger apartments, although "nicer" to live in, were not as good an investment as the higher prices were out of proportion to the rent they could return. One top level apartment was big and bright and had a better layout. It was also $320,000 and would return $330, compared to the second apartment which at $285,000 could return $310. I rang my husband. "We're not going to live in it. It's an investment. Go with the numbers." Salient advice. I put in an offer on the second unit.
8. Pay any loans down quickly
Here is my top DIY Super Investment property tip. If your expected rent does not cover the cost of your finance, the property you want to buy is either too expensive to purchase for your fund, or you are lending too much money. We currently pay 75 per cent of our super contributions onto the mortgage plus the rent and using this formula we expect the property to be paid off in less than five years. If either of us lost our jobs, the rent could still pay the loan, albeit over a longer period. We are aware we could probably earn more with the super contributions if they were invested elsewhere but our financial plan - and risk profile - is to get rid of the mortgage as quickly as possible so that the investment is revenue positive by the time my husband retires.
9. Happy investing
I got a real buzz out of buying our unit with our super funds. It's not the most glamorous property, but the numbers work, it's been consistently tenanted and since purchasing, and is returning a yield of roughly 6 per cent. According to RP Data, the median sale price for units in the area has risen 9.4 per cent over the past 12 months so my asset is also appreciating. Happy days!
• With thanks to my accountant Paul Simeoni who patiently stepped me through the process repeatedly over two years until I was comfortable with it. And then checked this article.
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