How To Choose The Best Property For An SMSF Investment?
Superannuation funds cannot develop properties because it changes the assets nature and is therefore, a breach of ATO regulations. There are, however, common SMSF investment choices like units, houses and other residential properties and commercial properties like retail spaces, offices, factories and listed or unlisted property trusts.
These are possible SMSF investment options that may benefit you and the fund but there are challenges in investing in them. Take the time to consider what you want your super to have for you when you retire and the types of investments that can provide for your needs as you try to meet financial obligations. If you make the right investments, you can expect long-term returns, but if you do not and without any preparation, you can lose a lot of money.
If you choose to invest in residential properties for the benefit of the next generation of your family, it is important to look out for properties that suit this plan. When investing in residential properties you should consider location, maintenance needs and yield. Look for a new property that has long-term capital growth prospects and high returns on rent.
An SMSF investment around capital cities or regional centres with various industries that support local economy is a good investment if you a looking for a long-term capital returns. Business and economic growth is safer and more sustainable in these areas. They provide more security than one-mine town or other volatile areas.
Getting high-quality tenants is also a factor in the success of the investment. Get the right tenants who are usually found in the inner-city. Paying a high premium on the SMSF investment is a risk you have to take to get your money’s worth.
Having enough money to purchase a property outright will make you not dependent on rental return, unlike someone who needs to borrow money to invest. You should look for about a 6% yield or more from your tenants to make loan payments. Your SMSF investment’s location should have access to a robust rental market with low vacancy rates to have as steady flow of tenants to make payments to loans you have made for the investment.
Having stored cash reserved in your SMSF is important if something goes wrong. Around $20,000 is a decent buffer in case the tenant does not pay the rent or you do not have a tenant for some time. You certainly do not want to run out of fund money.
If an SMSF holds a property longer than seven or nine years, be prepared for maintenance issues that occur as the property ages. If you want minimal work over time, a new and well-constructed property should be preferred. New properties can also make the most of depreciation benefits for tax.
Properties Suitable for SMSFs
- Established houses and units
As an SMSF investor, you do not need to buy a new or unusual property. If you have found a house, unit or townhouse that you want to live in when retirement comes, or simply like the character and old-fashioned style of an older property, you can purchase them through your super.
Investments made on older properties has become easier according to latest ATO rulings. Extensive repairs can now be carried out to SMSF properties like improvements through the eyes of the homeowner or tenant, instead of the law.
If your fund has enough money to cover the property’s entire value, you can make it your SMSF investment or you may invest in it. However, if you are borrowing to get the SMSF investment, keep the important fundamentals of investing. This includes a good location with economic growth potentials, a tight rental market with good yields that will pay for the loans and quality tenants. Investing in the prestige market may not be possible unless you have a very high salary. Properties near the middle ring city suburbs are your best bets.
Be warned that older or established properties require more maintenance which may eat your super returns. You are also likely to miss out on tax depreciation benefits.
- House-and-land packages
Land near capital cities is a valuable asset. Homes in well-located plots of land are attractive to tenants especially if they are new. They also attract depreciation benefits. Regulations for properties with land has also been easier recently.
According to ATO, it is now okay to borrow to purchase and add a granny flat paid in cash from the fund, as long as it is all in one title and that you do not have to borrow money to build it.
Be warned that cheap sales of surrounding properties can bring down the value of the investment.
- Dual key properties
Dual key properties are two separate dwellings in a single title. They are usually located around capital cities and offer higher rental yields. Having dual cash flows will give the owner the yield of a commercial property but with better security. There is no problem with the single asset rule because the dwellings are on one title.
Be warned that they attract fewer buyers if you intend to sell in the future
- Serviced apartments
Other guaranteed yield properties like serviced apartments are popular with SMSF investors due to the promise of high returns. The guaranteed rental yield of 6.5% and an annual incremental increase of 4% and the offer of 100% tenancy makes this SMSF investment option attractive. The guarantees are possible by the franchise style business model. The franchisees have a contract with the individual landlords and the rental income and ongoing costs are taken cared for by the entire company.
Super assets are supposed to provide pension with low volatility and serviced apartments, when you move into the pension phase will produce income and allow pensions to be paid without selling assets.
Be warned that they offer greater yields but are dependent on the economy. And the economy is sometimes volatile.
- Commercial property
Commercial properties are extremely beneficial for your SMSF investment. SMSFs are known for investing in office spaces, warehouses, retail outlets, factories, and carparks. Commercial properties are similar to residential properties but some differences make them more attractive and riskier as SMSF investment.
Commercial properties are likely to get longer leases and higher yields. However, vacancy periods take longer and depend on the overall economy.
The benefits of commercial properties
Greater Income from rental. Commercial property investments offer higher returns from rental than residential investments. Office spaces have average returns of around 7-8%, depending on the city it is in and residential homes yield around 4-5%.
Longer leases. The lease on residential units usually averages at six months or a year, while commercial properties go for a number of years.
Low maintenance costs for higher net yields. The tenants of the commercial property are responsible for maintaining and managing the property. This means that you save on ongoing expenses like repairs and counts a higher net yield.
The fundamentals. If you intend to invest in a commercial property, invest in a thriving location, with plenty of business around to support and great transport access.
Business real property exemption
ATO has made buying the commercial property from a related party with the business real property exemption possible. When the SMSF buys the business site, the business becomes the tenant of the SMSF and should pay the commercial rate of the rent. This will enable the business owner to have access to cash which would not have been available if he did not sell the property to the SMSF. He can then use this cash to expand his business or pay off debts. If the business gets into financial trouble and the business cannot make rent payments, the SMSF should implement the same processes as a landlord would. Before making another SMSF investment, if would be best to consult an SMSF auditor or professional to get a better insight.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.