Q. Provided my self-managed super fund (SMSF) trust deed allows for property investment, are there certain types of properties that suit SMSFs better than others?
A. There are a couple of things to take into account when selecting a property that will be owned by your SMSF. If the SMSF is borrowing (i.e. taking out a mortgage) to assist with this acquisition, then there are a couple of specific issues that need to be considered.
Firstly, the title of the property needs to be reviewed. It is important that the property is all on one title. This isn’t an issue for most houses but may be an issue for apartments, as often car parks and storage units can be on separate titles. If the property does have more than one title and those titles can be dealt with separately (e.g. the car park is on a separate title and there are no laws or owners’ corporation rules that prohibit you selling the car park and retaining the apartment), then these assets will need to be subject to separate borrowing arrangements (i.e. separate loans, bare trusts, etc.). This can become problematic and costly, so it’s best to try and avoid properties of this nature.
Secondly, properties that require renovations to improve the property and properties with development potential may not suit SMSFs. The law states that if your SMSF invests in a property with borrowings and you would like to renovate it to improve its rental income (e.g. new bathroom and kitchen), the SMSF can undertake these renovations, but it cannot borrow to do so. The renovations will need to be funded via a cash contribution from the SMSF. Depending on how much cash and other assets your SMSF holds, these types of property acquisitions may or may not be appropriate.
Apart from the borrowing considerations, there may be additional things to take into account, depending on your strategy. For example, if your strategy is to buy and hold (i.e. you have no plans to sell the property), then higher-yield properties suit SMSFs, due to their lower-tax environment. Commercial properties, for example, are perfect.
However, if your strategy is to sell the property after retirement to allow you to reduce debt, then a high-growth property may suit your SMSF, as you can sell it after retirement (i.e. once your fund is in pension phase) and avoid paying any capital gains tax.
So, the property type somewhat depends on your strategy.
Stuart Wemyss, Property Tycoon Finance