August 22, 2010

Podcast interview – purchasing investment property in your SMSF

By Kris Kitto

I just came across this podcast / audio interview conducted by Lee Woodward of Real Estate Academy talking about purchasing property using your self managed superannuation fund which is very informative and thought I would share it with you along with some notes based on my experience of assisting clients with purchasing property using their SMSF and an instalment warrant structure.

Click to play the interview

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The synopsis provided is as follows:

The New Australian Dream is an opportunity to purchase property using a Self Managed Super Fund. On this audio Lee Woodward CEO of Real Estate Academy, has tested the strategy and interviews the Westpac Banking Corporation and a Financial Planner to give you a clear, concise plan in 10 simple steps to achieve the new Australian Dream. Enjoy this audio and learn the new investment strategy taking the nation by storm.

Notes and additional information:

1. Your accountant might a nice person and give great tax advice – but it doesn’t mean that they know how to assist you to purchase property via your SMSF and get a SMSF loan approved.  Personally I have assisted a assisted a fair number of my clients make these deals happen – and in most cases they have been new clients who came to me and my company because their previous accountant could not help them.

2. Any SMSF trust deeds older than 2 – 3 years will not be able to utilise the strategy.  This is because the laws only changed in September 2007 to enable borrowing.  Also be careful when purchasing trust deeds through online providers – often their deeds are outdated or simply are not written in a way which make it easy for SMSF trustees to utilise some strategies.

3. You will need two companies – one as trustee of the SMSF, one as trustee of the bare trust / custodian trust that will hold the title of the property until the loan is paid off or the title is sold.  You heard it folks – straight from the banks mouth – YOU NEED A CORPORATE TRUSTEE FOR YOUR SMSF!

4. Lee (conducting the interview) mentions that the bare trust / custodian trust is kinda like guarantor on the SMSF loan.  This is technically not right – it is a custodian that simply holds the title of the property on behalf of the SMSF – it is slightly confusing so I will let him off!

5. It is essential to set a budget and obtain pre-approval or approval in principle based on the purchase price of the property, expected rent, SMSFs contribution / deposit etc.  This is great advice.  Shortly I will release a couple of Microsoft Excel SMSF property purchase calculators that will help you do this.  I also have one from St George Bank which is useful to determine how the bank will view the SMSF loan serviceability.

6. You need a solicitor who knows what they are doing.  Lee highlighted that his lawyer was inexperienced in these types of transactions so he sought assistance from Westpac’s lawyers – Gadens for the set up of the custodial / bare trust.  Last time I checked Gadens charge $2,200 to establish the custodian / bare trust (which doesn’t include the trustee company!) – I have access to another custodian trust loan provided whose trust deeds and documentation have been approved by Gadens and are significantly cheaper.

7. Correct name on the contract (essential).  The trustee company of the bare trust / custodian trust must be the name (and only name) on the contract.  Jason from Westpac has correctly said that this is where the majority of people trying to do it themselves or with the help of an accountant, planner or solicitor who don’t know what they are doing get it wrong!  Don’t be one of these people.

8. Based on the above point, it is essential that the trustee company for the custodian trust be set up prior to signing any contracts for purchase.

9. It is covered that you cannot re-borrow against any built up equity.  If you want to access any built up equity you need to sell the property (it is NOT locked in stone), realise the investment gain and then re-invest into further properties.  This is the only way to be able to obtain the snowballing effect.

10. LVRs are up to 80% for residential properties – fantastic!

11.  What has not been mentioned is the costs.  In addition to the set up of the SMSF (if you don’t have one already) and the custodian / bare trust are the costs for Westpacs solicitors (Gadens) and also the establishment fees.  These need to be taken into consideration and will be paid by your SMSF.  It will cost you more than purchasing in your persona name – however it is well worthwhile to be able to make a sometimes forgotten asset – your superannuation – get working for you by buying property.

12. Insurance – I was good that near the end of the interview they touch on insurances – especially income protection, total and permanent disability and life insurance.  If you purchase a property in a SMSF (with our without a SMSF loan / instalment warrant) you need to have appropriate insurance in place.

Overall it is a very informative podcast and especially good getting the perspective from Jason from Westpac as the banks currently are the gatekeepers when it comes to SMSF loans.

Chances are, you probably have more questions about utilising this fantastic opportunity SMSFs now have to purchase property using borrowings.

I encourage you to post a comment below if you have a question or contact me directly clicking here.