Within the ambit of this article, let me field a few pertinent SMSF questions.
1. What amount can I borrow for property investment using my Superannuation?
You typically need four pieces of information. These include the rate of interest of the loan, rental income or cash flow, your annual salary, and your salary sacrifice. SMSF loan calculators factor in all these information to come to the eventual loan figure.
Loans borrowed via Limited Recourse Borrowing Arrangement (SMSF property loans fall in this category), just as the name suggests, offer limited recourse to the lenders. So if there is an event of borrower default, the lender can go on to attach the property and any other asset locked in as security but not the other Super assets.
2. How safe is it to borrow money for your property by using SMSF?
If you do not mess around with the declared investment strategy of your fund and use Due Diligence then your SMSF can turn out to be a great aid in property investment. Yes, there is a Taxpayer alert but it is more in line with whether you should go for a particular investment or not and the ATO alerts you keeping your investment strategy in mind. The alert also asks you to reconsider whether a particular property in question is good enough to meet your investment needs.
3. Which between capital gains and rental yield should investors have in mind while exercising SMSF borrowing for their property investment?
The answer to this question largely depends on your fund’s investment strategy. If you are looking for funds to ease out your post-retirement worries then a “capital gains” strategy will work best for you. On the other hand, if you are looking for a well-sustained member balance during retirement, positive gearing can work fine for you. It is to be noted that even the negatively geared properties turn into positively geared ones in due course of time provided it complies with the growth cycle norms. If your property’s value is likely to appreciate with time, you can make most of the deal during the payment or pension phase when zero rates apply.
4. What factors should I consider while formulating my SMSF investment strategy?
Among other things, you need to keep a tab on your fund’s risk-benefit equation, liquidity , diversification potential, member’s requirements and fund’s power to pay costs incurred.