We’ve found over the years that some people just don’t like investing in market based assets (shares, funds, etc) and they prefer the security of physical real estate, the traditional bricks and mortar investment.
While we do advocate a diversified strategy with funds allocated to different asset classes we also realize that sometimes a simpler property strategy might be a more comfortable solution for your situation.
There are myriad options for buying an investment property and we can certainly advise you on a standard investment property strategy – but so can most advisers, banks and brokers.
We were one of the first entrants into the self managed superannuation fund geared property market and as such we’re ideally placed to advise you on this strategy.
Super funds were never allowed to directly borrow money for investments. In the mid 2000’s several operators found some loopholes in the legislation and this gave rise to some very risky strategies. In 2007 the government altered the legislation to allow for borrowing in some limited circumstances. The idea behind the change was to regulate the borrowing activity to provide more safety to superannuation investors.
How does it work?
By itself a super fund is still not allowed to borrow money. But with the right structures in place limited borrowing opportunities do exist.
The main conditions are:
- The loan must be limited recourse: This means that the lender can’t try to repossess other superannuation assets if the lending strategy fails. This provides the investor with a good amount of protection.
- The money must be used to by a single asset: This means that the strategy is well suited to property. The money can’t be used to buy a group of assets, e.g. a share portfolio containing different shares, or a house and land separately.
- The strategy must meet the sole purpose test: The sole purpose test mainly refers to the investment being made for the sole purpose of funding your retirement. The best example of failing the sole purpose test would be if you ever lived in a property purchased by your super fund.
We don’t expect you to become experts in superannuation legislation so our role is to guide you through the process so that everything is set up correctly.
Do you qualify?
You do need a reasonable amount of money in super to start with for this strategy to be workable.
Here is a sample cashflow showing an entry level version of this strategy.
Purchase details Amount
Purchase price $350,000
Less Deposit (35%)* $122,500
Loan required $227,500
*The banks do allow for a lower deposit than this but we don’t recommend that you exceed a 65/35 loan to equity ratio.
Purchase cost allowance is approximately $20,000 (stamp duty, solicitor’s fees, bank fees , etc) so the super fund needs to come up with $122,500 + $20,000 = $142,500. If your combined super balance (e.g. husband + wife) is more than this then you may qualify for this strategy.
Loan details Amount
Loan amount $227,500
Interest rate (example) 7%
Expected Rent $17,500
Of course there are other costs associated with owning a property and these need to be accounted for. Rates, insurance, agent’s fees and maintenance all need to be considered. Keep in mind that your employer super contributions will also be coming into the fund and these can be used to cover any other expenses.
Like any property strategy the main benefit is the growth of the property. From the cashflow point of view when expenses are included your cash will actually be going backwards, e.g. owning the property will cost more than the rent you receive. This is a negatively geared scenario. In any negatively geared scenario you are relying on the growth of the property to arrive at an overall positive return.
Let’s say that after costs in the example above there is a $7,000 annual cash shortfall. If the property grows by 2% then you will break even (2% x $350,000 = $7,000). If the property grows by more than 2% then you have made a profit.
Keep in mind that super funds do have to pay some tax, albeit at a reduced rate, and the figures above don’t consider the impact of tax or the costs associated with selling a property. We can provide you with a more detailed analysis during our meetings.