Should you borrow to buy property in your DIY fund?
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Banks will happily lend 80 per cent of the value of the property inside super. Jessica Shapiro
We ask Chris Duffield from Dixon Advisory if it’s feasible for the average person to borrow money for a property through self-managed super.
Is it wise for DIY super funds to borrow to invest in property, given the rules are so complex?
Absolutely. Borrowing to invest inside a DIY fund has potential to be a very powerful tool. The strategy does have some complexity, so it is essential that an investor seeks professional advice – especially when buying property. There are packages, starting from $5000 all-up, for advice, nominee company, trust deed and execution of all compliance elements, and they are relatively easy for the DIY super trustees to access. The key is to ensure the expected tax saving exceeds the cost of establishment, and there are good examples of this.
What type of properties might suit DIY super investors? Do you have a preference for commercial or residential?
We concentrate on residential property. It has historically less volatility and a lower correlation with other asset classes. This means it provides better diversification. If you want to borrow to buy a property in super, you’ll typically find the costs of establishment and borrowing will be lower with residential real estate too. Commercial and office real estate, while offering strong headline rent, can have protracted periods of vacancy and experience subdued capital growth – issues a DIY trustee will have to understand and accept.
What features should DIY super investors look for in a property?
The main features that arise when selecting an investment property for a DIY fund are that super is an already concessionally taxed environment, so large tax deductions are worth much less than for investors buying outside super. So DIY super investors should focus on the stability of rental payments (particularly when drawing a pension from a fund) and solid capital growth characteristics (when still saving for retirement). When borrowing, investors need to ensure the property is on a single legal title and that the decision to buy the property is based purely on the projections of financial return, not emotion (you’re unable to personally use a property owned by a super fund; it must be for investment only).
How much capital do you need in a super fund before considering an investment in real estate?
These days, banks will happily lend 80 per cent of the value of the property inside super, meaning you need to fund the remaining 20 per cent, plus transaction costs. Typically, once you have a DIY fund with about $120,000 in it (this can be between as many as four members) then you are able to start looking seriously at property investment.
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