How to Use a Self-Managed Super Fund to Invest in Property, and Build Wealth … Your Biggest Questions Answered
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Self-Managed Super (SMSF) is providing some powerful opportunities for investing in property, multiplying your wealth building abilities and decreasing your tax bill. Sick of the lack of transparency offered from traditional super funds many Australians are turning to property investment in SMSFs to fund their retirements.
And the ability to invest in property through a SMSF means that their superannuation is exposed to an asset class that they understand.
Compared to shares, which can seem quite volatile…people feel comfortable that if they buy a property in the right area, it’s a reasonably safe thing to expect a pretty solid rental return or a pretty consistent rental income.
However, even with all the benefits, using a Self Managed Super Fund to invest in property still remains a somewhat confusing subject.
So, I got on the phone with Sam Wetzler from Sequoia Asset Management to have him answer some of the biggest questions from our readers… and share some ideas about what is possible when it comes to investing in property through your Superannuation.
Over the coming 3 articles, you’ll discover:
- How to unlock the equity in your super to invest in property
- How to pay zero capital gains tax
- How to create a tax free income stream
- How to invest in a 15% tax environment vs a 45% tax environment
- How to pay down a loan much quicker
- Common limitations when it comes to investing in property with your SMSF
- A trick to buying multiple properties in a SMSF
How to invest in the property market without any out of pocket expenses.
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Unlocking the equity in your super to buy investment properties … And investing in the property market without any out of pocket expenses
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Peter: How do you pay for a property bought in a SMSF? Do people have to contribute their own money?
Sam: The great thing is, you don’t have to use your own money, just the balance in your superannuation This is one of the key advantages of buying property using super.
There’s a lot of people out there, who have, say, $200,000 in their super fund and are dreaming they had that sort of money in cash in their personal name to invest. With the standard LVR available to SMSF investors sitting at between 80%-70% investors could potentially buy a $1million property using their super.
So, it’s a great way to get exposure to the property market without actually having to pay anything out of your back pocket. What do I mean by this?
- The cost of setting up the super fund, is paid for by the super fund.
- The cost of administering the super fund is paid for by the super fund.
- All the expenses of the property are paid for by the super fund.
- I should also note that all of the benefits of the property i.e. the rental income or capital gains are also retained by the super fund. Until you retire of course.
One of the big benefits of investing in super is that generally most of the money going into the fund (think employer contributions) are going in pre-tax. So you are paying these expenses with your pre-tax super contributions.
Employer contributions and any salary sacrifice goes into the super fund before tax and and is then only taxed at 15% in the super fund. Whys is this such an advantage? Well let’s say you are on the highest marginal tax rate of 24%. For every $1 you earn you give away 45 cents to the tax man. That leaves you with 55 cents to pay your expenses and pay down the mortgage (ignoring any offsets you might get). In super, the tax man only takes 15 cents to every dollar you earn, so you’re getting much more bang for your buck so to speak.
…So essentially you could expect to pay down the loan a lot quicker, because you’re paying a lot less tax with every dollar you earn in super.
Another huge advantage is that once you retire, there’s no capital gains tax.
That means you pay zero tax, on capital gains, if you choose to sell the property.
Or you might decide to keep the property, in which case the rent becomes a fantastic tax-free income stream.
Free eBook: Sequoia has recently published a comprehensive E-Book on buying property in super.
By downloading the ebook you will learn:
- Benefits, common mistakes, tips & tricks of buying property in super;
- How to buy property with and/or from a related party;
- How to borrow money to buy property with an SMSF and the rules around it;
- How to carry out property developments using an SMSF;
- How to buy rural property with an SMSF.
Key risks generally associated with buying property with an SMSF.
Sam Wetzler is an Authorised Representative of Sequoia Asset Management Pty Ltd (AFSL 341506). His commentary in the above email is General Advice only. General advice is advice which is provided to you without regard to your individual objectives, financial situation or needs. It is not specific advice for any particular investor and it is not intended to be passed on or relied upon by any person. Before making any decision about the general advice provided, you should consider the appropriateness of the general advice presented, having regard to your personal objectives, financial situation and needs. He believes that the commentary above was correct at the time of compilation, however no warranty of accuracy or reliability or completeness is given to any information contained in this commentary and he, nor Sequoia Asset Management Pty Ltd accept any responsibility for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any person by reason of negligence) by any person or entity relying on this commentary.