Hi,
I have an SMSF with about $120k (just sitting at the bank currently) and I want to buy an investment property with the super (in order to rent it out for income into the super).
I am planning to speak to a financial advisor and also to my accountant to get specific advice.
At this point in time I want to educate myself in this area and do some research. I'm living in Elwood, VIC.
I'm sure there are plenty of learning resources for personal real estate investing. Are some better than others? I imagine there are less resources that focus on the details of SMSF real estate investing.
I'm looking for some recommendations for books, webinars/online learning etc.
Some particular areas I want to learn about are:
- Is $120k enough to get started or should I save more first?
- How much should the deposit be?
- What house prices should I be going for?
- Buy in inner suburbs or further out?
- Buy a house or unit or townhouse or flat?
- Buy in the East side or West side of Melbourne?
- Does it matter if the property is far from where I live?
- Should I go for a cheap property and a smaller loan (i.e. small flat, or outer outer suburbs)? Or get a more expensive property which could appreciate more?
- Positive vs negative gearing? (I have played a lot of Kiyosaki's Cashflow game and do like the idea of positive gearing)
- Can an SMSF use an offset account? Should it?
- Can an SMSF get a 30 year loan or only commercial type loans (5 years)?
- How to find an agent for renting it
- Should I get a place which already has tenants in it?
- Find out about hidden costs like body corporate which could ruin the investment (a friend got a flat which included gym and pool access with excessive body corporate which pretty much eliminated the rent profits)
- Auction or private?
- Finding a conveyance lawyer
- Intricacies of landlord insurance
- Business plan/case templates for working out profitability
- What inspections should be done before buying and who to use? Termites? Cracked foundations? leaks?
- Buy a new property, newish or old?
- Buy a run-down bargain and renovate?
- Should you get a finance pre-approval? Does this apply to SMSF since they are companies?
- Are there any special considerations to getting a bank loan for an SMSF?
- What are gottchas to watch out for with signing contracts?
- Other gottchas such as easements on the property/council/plan issues?
- Things to watch out for like train noise?
I'll try answer what I can here…
Is $120k enough to get started or should I save more first? This depends on your appetite on pros vs cons. Do you have an SMSF already? SMSFs can be costly for various maintenance costs (establishment costs, accounting/tax fees, auditing fees, supervisory levies charged to the ATO). You need to consider if these costs to purchase a property in an SMSF are a good enough reason to establish one. You also need to consider if you intend to make losses on your investment if your capital is not sufficient (negative gearing vs positive gearing). You'd ultimately prefer to pay tax on profit than accruing tax losses etc
How much should the deposit be? Generally 10%, but I can be proven wrong. Another question might be: How much capital do you think is sufficient to kick off this investment?
Positive vs negative gearing? (I have played a lot of Kiyosaki's Cashflow game and do like the idea of positive gearing). I'm not sure what Kiyosakis cashflow game is, but the concept is pretty simple. If your income from the investment is greater than the costs expended, you've positively geared. The reverse would hold for negative gearing. Positive gearing would personally be my opinion to a better investment. Negative gearing will allow you to sustain the investment idea for longer until you can make profits and offset it with your accrued losses, but you can't make money by negatively gearing.
Can an SMSF use an offset account? Should it? Your accountants and advisers will need to operate under an AFSL to generally give you advice on SMSF investments, but the short answer is no. An SMSF cannot 'borrow', but in controlled circumstances, it can obtain financing via methods known as limited recourse borrowing arrangements (LRBA). It won't be able to simply offset the loan and draw down on the loan
Can an SMSF get a 30 year loan or only commercial type loans (5 years)? If you can pay it off earlier, the loan financier should be able to give you options, so I don't see why not
How to find an agent for renting it? Any agent will be able to rent it. The purchaser, being the SMSF (the trustee, read below), is only a name on a generic rental agreement
Find out about hidden costs like body corporate which could ruin the investment (a friend got a flat which included gym and pool access with excessive body corporate which pretty much eliminated the rent profits). Ask the questions when looking (how much is the quarterly strata, what is an average electricity bill etc). Recurrent costs generally include body corporate/strata, water, gas, electricity, cleaning etc
Auction or private? Personal preference
Should you get a finance pre-approval? Does this apply to SMSF since they are companies? An SMSF is a special purpose trust, not a company. It's trustee will (generally) be a company, who will be the purchaser on all contracts
Are there any special considerations to getting a bank loan for an SMSF? It must be under a limited recourse borrowing arrangement. I think the highest LVR is 70/30 with an SMSF, but best to check with the financier
What are gottchas to watch out for with signing contracts? Ask your lawyer to review it for anything that stands out such as warranties that have expired earlier than standard warranty periods etc
Sounds like you've got a lot of questions, so good luck with your purchase!