Let’s face it, we all have dreams about what we’d like to do when we finally retire. But funding that retirement takes a lot of careful thought and planning to ensure that you’ll have enough cash flow to do all the things that you want to do.
Purchasing an investment property with an SMSF property loan may just be the solution to help you to provide enough retirement income. This will allow you to enjoy the kind of retirement that you’ve always dreamt about.
According to statistics provided by the Australian Taxation Office, in June 2016, there were a total of 577,236 self managed super funds with members totalling 1,087,841.
This number is constantly increasing as more people are opting to take control of their super by establishing their own SMSF and transferring their current superannuation holdings. In fact, nearly half of new SMSF trustees are under the age of 45.
As these trustees are continuing to educate themselves in how to best manage their funds and what the best investment strategies are, many are deciding to use their SMSF fund to purchase property, both residential and commercial.
So How Are These Trustees Able To Invest In Property Using Their SMSF?
Quite simply, the SMSF fund can borrow money to purchase residential or commercial property as part of its investment strategy. This type of loan is called a limited recourse borrowing arrangement (LRBA).
The advantage of this type of loan is that if problems do arise and the fund or trustees default on the loan, only the asset purchased with the loan can be repossessed while all other assets of the fund are protected.
What Are The Benefits Of Purchasing Property With An SMSF Property Loan?
Of course one of the main benefits is that you’re diversifying your investments to include property. This is likely to increase in value over the years and therefore increase your total retirement fund.
There are however, a number of other benefits with this kind of investment strategy.
- It’s easier to pay off your property loan faster – all the rental income received from the investment property goes back into your SMSF to pay off the loan. In addition the contributions you and your employer makes to the fund can also help to pay off the property loan much faster. Once the loan is paid off, all the rental income received will increase the cash in your SMSF and you’ll also have an asset which is constantly increasing in value.This is a great way to increase your total retirement savings.
- Pay less tax – Capital Gains Tax for an SMSF investment property is capped at 10% however if you decide to hold onto the property until you retire and then sell it, you’ll pay no Capital Gains Tax at all.
Another advantage is the rental income is taxed at 15% for a SMSF owned property as opposed to 46.5% on privately owned properties. Any costs which are incurred to maintain the property can also be used to reduce the taxable income of the fund. This includes interest on the loan, depreciation of items within the property and regular maintenance requirements.
Once you retire, the title of the property transfers to you and the rental income is tax free.
This is then an additional source of retirement income for you.
- Provides funds for further property investments – as the cash in your SMSF increases from the rental income of the property plus your own contributions, you can then use the increased cash to purchase further investment properties.
This is of course a long term strategy and will depend on at what age you start your first property investment with your SMSF.
- Diversify your investment even further by purchasing both residential and commercial property – an LRBA loan allows you to purchase both residential and commercial property. This means you can diversity your investments for extra capital growth.
- Improve your investment using SMSF funds – although you can’t make improvements to your property investment while you have an LRBA loan, you can do so using funds in your SMSF or even personal funds once the loan has been paid off.
You must remember though, that any personal funds that you use to improve your investment need to be recorded as SMSF contributions. These contributions must then be taken into consideration when assessing the relevant contribution caps.
- Move into your investment property once you retire – as we said previously, once you retire from the workforce, the title of your investment property is transferred to you.
This means that you can now live in this property if you wish and sell your existing home. You can then use the funds from the sale of your family home to further fund your retirement.
So if you’ve always dreamed about taking a world trip when you retire, you’ll now have the funds to do so without worrying about how you’re going to pay the bills back home.
So now that you understand the benefits of using an SMSF property loan to help fund your retirement, you’ll need to talk to a professional to work out all the details.
As is the case with any type of investment strategy, it’s important to consult a professional advisor and to educate yourself on all that is involved.
If you’re using your SMSF to purchase investment property, you need to ensure that there are enough funds available to not only furnish the loan but also to maintain the investment property.
You’ll also want to ensure that you purchase the right kind of property in an area that is likely to provide growth and that will allow your property to increase in value over time.
Once you’ve established that it’s indeed viable for you to purchase an investment property through your SMSF, you’ll be one step closer to realising your retirement dreams.