Tax and legal advice
Justin Beeton

6 biggest mistake SMSF property investors make: Part 1

By Justin Beeton

Buying property through an SMSF can be a rewarding investment strategy, but you’ll need to navigate these common mistakes to avoid rendering your fund non-compliant and landing in hot water. 

Blogger: Justin Beeton, founder and managing director, The SMSF Club 

Buying an investment property through a self-managed super fund (SMSF) is very different to buying the same property in your own name. There are special laws that need to be complied with, the banks’ lending requirements are different, there are more legal costs and the properties you have to choose from can also vary.

The main mistakes people make in this area include:

1. Property location
The location of your investment property impacts upon your potential rental returns, which are important in order to meet the loan repayments. It is very dangerous to purchase a property in an area reliant upon only one industry for its growth.

I have seen instances where people have acquired an investment property in a mining area in Western Australia, where the only industry was mining. There were three mines digging for iron ore and no other economic drivers. If the price of iron ore collapses or our exports to places like China drop off, so do the growth prospects of this town and finding tenants will become almost impossible. In these instances, the loan cannot be serviced and the property would need to be sold – probably at a loss.

More recently, we heard Holden’s announcement that it will be ceasing manufacturing operations in Australia in the next few years. This will have an obvious impact on those areas where Holden currently has manufacturing plants. So you need to carefully consider investing in an area reliant upon only one industry.

2. Incorrect legal structures
Incorrect legal structures are still being used by many people investing in property through an SMSF. If your SMSF will be borrowing money for the purchase, you will require a custodian/bare trust structure in place before contracts are signed. 

The purchaser on the contract cannot be the trustee of the super fund if borrowings are involved. When using borrowings, you must comply strictly with the laws set out in the superannuation legislation, including the ‘single acquirable asset rule’.

In short, you need to ensure your super fund is acquiring one title only. There is an exception for strata title properties where the car park is on a separate title if specified conditions are included in the strata plan.

Therefore, you cannot turn up to an auction on a Saturday, successfully bid on a property and sign a contract in your personal name, with the intention of changing ownership to the bare trust structure later on. By buying a property at auction, you are entering into a legally binding contract then and there.

The correct procedure is to have the bare trust structure in place before the auction. If you do not yet have the structure in place, do not buy at auction.

Some investors also get caught out buying a property with other people they know, using a unit trust structure. The superannuation laws do allow for this type of structure if done correctly. There are two main variations: one in which borrowings are allowed and the other in which borrowings are prohibited. Basically, two or more people with their own SMSF come together and their SMSF buys units in a unit trust, which owns the property.

However, the Australian Taxation Office (ATO) has come across cases where this structure has been used in ways that are non-compliant. If this happens to you, the whole structure will have to be unwound and the property will be sold. Penalties may also be involved, which you would be liable for as the trustee of the fund.

3. Family planning failures
Investors who are involved with multiple-member SMSFs can get into strife if they don’t account for the impact divorce or death could have on the fund.

An SMSF can have up to four members. Therefore, mum and dad and one of their adult children and the child’s spouse could make up a fund. As could two couples who know each other and/or operate a business together.

If a member couple files for a divorce, then you need to be aware that superannuation benefits are an asset that can be split under Family Law Act property proceedings. If the investment property or business premises owned by the SMSF comprises most of the super fund assets, then it is likely the property will need to be sold. If the property has not been held for long, then a loss is most likely after taking into account stamp duty, legal costs and sales commission.

In a similar way, if one member dies unexpectedly, their share of the property is part of their death benefit, which has to be paid out to their beneficiaries. Again, the property may need to be sold.

Don't miss my next blog where I'll reveal three more massive mistakes investors make when purchasing property through their SMSF and detail how you can avoid making these costly mistakes. 

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About the Blogger

Justin Beeton

Justin Beeton

Justin Beeton is the founder and managing director of The SMSF Club and the head of investments at Sequoia Asset Management.

The SMSF Club is a membership program designed specifically for anyone who has or wants an SMSF. With an extensive network throughout Australia, The SMSF Club integrates a tailored ongoing education program with ongoing administrative, compliance, and investment support. The SMSF Club assists members throughout every stage of the SMSF process. 

FROM THE WEB

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In this episode of the Smart Property Investment Show, Dominique Grubisa joins host Phil Tarrant to share her personal story which saw her hit rock bottom with excessive debt during the GFC.

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Dominique unpacks how, by relying on her background in law, she was able to overcome that debt and in doing so develop a unique investment strategy which she believes many can utilise today.

Dominique discusses distressed properties, and how she goes about finding them in order to buy property well below market value. She shares the process of identifying distressed properties as well as the controversy surrounding this buying method.

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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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

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:

Hobart
Bondi
Deception Bay

 

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Getting finance approved in this tightening lending environment

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