Tax and legal advice

SMSFs: Two things you must consider

By Naomi Mitchell

naomi mitchell tnThere has been a great deal of talk of late about self-managed super funds (SMSFs) and associated regulatory changes that may come into effect in the near-to-medium term future.

Blogger: Naomi Mitchell, partner,Younis and Co.

The growing popularity of SMSFs has led some market commentators to call for increased regulation – regulation that if introduced, could significantly impact on the way that property investors can borrow in SMSFs. Nevertheless, for the time being, SMSFs remain a feasible investment vehicle for many Australians looking to break into the property market or expand their portfolio.

In last month’s blog, I outlined some key considerations relating to SMSF property investments including: the importance of establishing the correct SMSF structure before signing a sale contract; and the implications of understanding (or not understanding) the restrictions placed on SMSF property acquisitions.

In this particular blog, I will focus on two equally important, but perhaps less obvious, SMSF considerations – these are: the unique nature of SMSF borrowing; and the requirements around preparing an investment strategy.

1)    SMSFs lie in a unique borrowing world – forget what you’ve done in the past

The processes surrounding finance approval for SMSF loans are very different to those for mainstream mortgage products. If investors don’t recognise these differences from the outset, they risk incurring unnecessary expenses and losing properties altogether.

Most investors, particularly experiences ones, will have established relationships with mortgage brokers. Indeed, some investors may have used mortgage brokers for prior purchases and received strong Loan to Value (LRV) ratios before moving ahead with nice and easy settlements – straightforward processes with minimal fuss and complications.

The key difference in the SMSF borrowing process is that investors need to fulfill the strict limited recourse criteria – meaning that if the borrower defaults at any point, the lender’s recourse will be limited to the fund asset being financed and the income rights associated with that asset. Because of these criteria, it can take a lot longer for lenders to approve finance for SMSF property purchases.

The problem that commonly arises in practice is that investors don’t realise that the SMSF borrowing process is unique. Based on their previous property dealings, they’ll find a property, pay a deposit, and attempt to secure finance three or four weeks into the settlement process. If, for example, the associated settlement period is six weeks (as is commonly the case), the investor often won’t be able to prepare and submit the required documentation on time.

This is why it is so important to secure finance pre-approval well ahead of any intended SMSF property acquisition(s). By doing so, investors can place themselves in a position to act swiftly and decidedly should properties of interest arise – giving them not only a competitive advantage over buyers without pre-approval, but also a clear price guide and a level of certainty when searching the market.

2)    Prepare an investment strategy

All SMSF trustees are required under the Superannuation Industry (Supervision) Regulations 1994 (“the regulations”) to prepare, implement and regularly review a documented investment strategy for their fund.

The regulations stipulate a number of non-exhaustive factors that the investment strategy must take into account including:

•    The risk involved in making, holding and realising, and the likely return from, the fund’s investments, having regard to its objectives and its expected cash flow requirements;

•    The composition of the fund’s investments as a whole including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification;

•    The liquidity of the fund’s investments taking into account its expected cash flow requirements; and

•    The ability of the fund to discharge its existing and prospective liabilities.

There are no formal requirements associated with the document’s layout; your investment strategy could theoretically be anywhere from a hundred lines to a thousand pages. However, the more thorough you are, the more likely you’ll be to comply with the regulations and devise a strategy that works.

They key thing to remember when selecting a property (or properties) for your SMSF is that each investment must ultimately meet the objectives of the SMSF. This means that any prospective property investment must be aimed at benefiting members of your fund on retirement or fund members’ dependants (should a fund member pass away prior to retirement).


 About Naomi Mitchell

naomi mitchell

Naomi Mitchell has over 17 years’ tax and business advisory experience. She specialises in superannuation, overseeing over 120 self managed superannuation funds with assets over $40 million. Her clients cover a diverse range of industries including food manufacturing, construction and engineering, and hospitality.

For more information on SMSFs or the various services that Naomi and her team at Younis and Co offer, please visit http://www.younisco.com.au/.

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If Mark Hodge’s face looks familiar to you it could be because of his time working as a professional entertainer which saw him working with the Australian ballet, appearing on multiple seasons of Dancing with the Stars and touring in musical theatre for 17 years. What you may not know is that Mark is also heavily involved in the short-term property rental marketspace.

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Mark joins host Phil Tarrant to discuss his transition from entertainer to investor, a journey pushed forward by dance related injuries and even a hit and run which saw him needing to find alternate methods to bring in an income. Mark shares how bad long-term tenants and a gang member guided him to the short-term rental market, and how this pushed him into helping others to realise the same benefits.

Mark will also address the common concerns, discuss what his company Maisonnets specialise in and unpack how they are making the process of filling short term rentals easier for investors.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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AREAS MENTIONED:

Melbourne
Sydney
Rushcutters Bay
Maroubra
Potts Point

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From pirouettes to property investment
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Jillian Stewart's investment journey began in 2009 with a property loan being used for anything but - and the purchase of half a house. And while she claims to have done everything wrong along the way, her current portfolio boasting 15 (and a half) properties, suggests otherwise.

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On this episode of the Smart Property Investment Show, Jillian joins host Phil Tarrant to unpack her portfolio and explain the reasoning behind her investment decisions. She discusses her plan to purchase through the company and reveals the link between her properties, earth moving and cotton farming.

One of Jillian's daughters joins in briefly to discuss the value in educating children about money, and how another is just about ready to purchase her first property - while still at school! They also reveal how Jillian encourages her children to grow wealth in a move that many kids might not be too happy about.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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Where are listings seeing the biggest rises and falls?
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AREAS MENTIONED:

Moree
Inverell
Walgett
Come By Chance
Sydney
Stuarts Point
Kempsey
Northam
H
exham
Hervey Bay
Craignish
Nurrumba
Dysart
Inverell
Tannum Sands
Mackay
B
oomi
Goondiwindi
Deception Bay

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Half a house to more than 15 in 8 years
object(stdClass)#1197 (52) {
  ["id"]=>
  string(5) "18251"
  ["title"]=>
  string(58) "Where the major off-the-plan hotspots are around Australia"
  ["alias"]=>
  string(58) "where-the-major-off-the-plan-hotspots-are-around-australia"
  ["introtext"]=>
  string(231) "

Buying off-the-plan can be lucrative in the long run, if you can get over the risk factor. If you want to minimise the risk and maximise your chances at profitability, these suburbs might be just what you’re looking for.

" ["fulltext"]=> string(3007) "

Outlined in The Australian Off The Plan Sentiment Report, published by Investorist, Domain’s data scientist Dr Nicola Powell has outlined where in major markets investors should focus their efforts when purchasing property off-the-plan:

Sydney

The south-west region of Sydney has seen an increase of interest in new developments, with Leppington, Austral and Edmondson Park, as well as Marsden Park, which all offer the widest variety of developments available to buy into, according to Domain data.

Sydney was also the most popular capital city for off-the-plan interest, with Domain recording over 2 million views for the property type.

Brisbane

The increased number of new developments has impacted on price growth in the unit market with supply stronger than demand, yet off-the-plan listing prices remain higher than listing prices for all new developments.

The full extent of the market however is yet to be seen, as it is adjusting with the fall of new development commencements and completed developments slide from the peak. Boutique developments in the inner city, targeted towards owner-occupiers, have the potential to show signs of improvement amid underperforming inner city Brisbane units.

Canberra

The key area in all of Canberra is Gungahlin, which according to Dr Powell contains numerous opportunities for buyers, as the area has seen a “significant transformation”.

Gungahlin currently is Canberra’s fastest growing area, seeing its population double in the last 10 years, there is a light rail project under construction and the first commonwealth government agency is scheduled to relocate to the area. Moncrieff is the most popular Gungahlin suburb, with the most development listings and views according to Domain data and has continued to remain popular even with other developments undergoing construction in Throsby, Taylor and Kenny.

Melbourne

Out of all the property types, new house and land packages topped Domain’s list for Victoria in 2017 with 1.8 million views, showing there is high demand for them due to employment opportunities getting stronger and affordability hurdles getting lower. There is also a solid chance for growth, as the strong demand saw prices for new house and land packages rise over 2017.

West Melbourne was the most popular region for off-the-plan supply and demand with the most listings and views, with popular suburbs including Tarneit, Werribee and Rockbank.

Perth

Demand for new house and land packages were proportionally high, making up 87.5 per cent of all listing views, with the majority of listings stemming from south-west and south-east regions of Perth, with the suburbs Baldivis, Piara Waters, Wellard and Hilbert ranking at the top.

There was also strong demand for listings in the north, which include the north-east suburb of Morley and the north west suburb of Doubleview.

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Where the major off-the-plan hotspots are around Australia

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