Is it worth buying property through a super fund?
BUYING a property through an SMSF (self managed super fund) seems to be the latest fashion, but does it wear well?
It can be a good idea for a small business to buy its business premises through a self-managed SMSF but what in many cases is the situation with residential property?
You may wish to follow the money...
If a couple have $250,000 in super between them they pay anything from $1500 to $5000 in fees a year, depending on what kind of super fund they are in.
If they set up an SMSF and buy a property and $250,000 is often the minimum recommended balance to set up an SMSF, it is a very different story. If they borrow $400,000 in their SMSF to buy a $600,000 property as an investment as many people do, they pay a lot of fees and taxes. These include about:
Up-front fees of about $2000 each to accountants and lawyers, $500 to ASIC (that is, the Federal Government), $1000 in loan establishment fees, and stamp duty of $25,000 to $35,000 - altogether $30,000 to $40,000 in one-off up-front fees.
On an ongoing level they pay about $2000 a year to accountants, $300 to SMSF auditors, $2000 in council rates, $1000 in landlord insurance, $2000 in letting fees and $16,000 to $24,000 in interest - altogether $23,000 to $30,000 a year, every year. This is up from $1500 to $5000.
One of the main ways to manage investment real estate cashflow is to get a tax deduction from depreciation and the interest paid but, at 15% the SMSF tax rate is much smaller than outside super so this is not much of a benefit - this big loss in benefits is actually one of the main reasons I rarely like buying property through super.
In other words, you lose 15% or more of your funds through up-front fees and then you spend another 10% or more a year every year in fees and interest and you don't get much of a tax deduction.
If the property market where you own your property does well, then it could be financially worthwhile but if it doesn't - and much of Australia outside Sydney and Melbourne hasn't done well for quite a while - then the whole exercise becomes an expensive burden that can lose you most of your retirement savings.
In the meantime a lot of people have received substantial funds from you and, with the exception of the banks, without any risks.
Please feel free to contact me if you would like to go through the numbers in your particular case.
Christoph Schnelle (firstname.lastname@example.org) is the principal of In Your Interest Financial Planning and Auth Rep 308223 of FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances.