Why Buying Residential Property in Self Managed Super Fund is a Million-Dollar Mistake | Efficient Capital

Investing through a self managed super fund (SMSF) is a mainstream strategy for those Australians who seek greater control of their retirement wealth. However, using your SMSF to invest in residential property especially through SMSF loans is a costly, long-term action. Here we explain how such a practice tends to go wrong, and how Efficient Capital can help you make wiser financial decisions.

What Is a Self Managed Super Fund (SMSF)?

A self managed superannuation fund is an individual superannuation fund that is controlled by a trustee and provides greater investment flexibility than traditional industry or retail super funds. While your SMSF can be used for any range of investments like SMSF lending for property taking advantage of this liberty will involve embracing a complicated regulatory system and enormous responsibilities.

Residential Property: Illusion of Stability

Others are drawn by the perceived safety of real property within their self managed super fund. But this strategy typically accompanies SMSF loans with:

• Greater interest costs than typical home loans.
• Huge deposit requirements typically 20%-30% of the worth of the property.
• Ongoing administrative and legal charges.
• More stringent loan serviceability terms.

If the residential property does poorly, your SMSF is still on the hook for repayments, rates, and maintenance, nibbling into total returns on your retirement.

Compliance: The Hidden Risk

Strict regulations limit what your self managed super fund can do with residential property. You or any related party are not allowed to use the SMSF property, and the investments must satisfy the sole purpose test accumulating your retirement savings. Breach can result in hefty tax penalties or even disqualifying your SMSF, with additional risks if you contravene SMSF lending rules.

Lack of Diversification and Liquidity

Sucking all your money into a single dwelling property restricts your self managed super fund’s ability to diversify, exposing you to unnecessary risk. Dwelling property is not liquid if your fund must pay out benefits or meet unexpected expenditures. Time is required to sell the property, and it may be sold at a loss, especially in the case of outstanding SMSF loans.

Why Commercial Property Is Different

Commercial property purchased via your self managed super fund and financed through SMSF lending may have less restrictive terms. You can lease commercial real estate to your own business (at market rates), collecting a regular cash flow and helping your SMSF keep better on top of its compliance obligations.

Efficient Capital: How We Can Help

At Efficient Capital, we are experts at guiding you through the maze of SMSF lending and property investing. Here’s how we help trustees and investors:

• SMSF loan structuring expertise: We make your borrowing compliant with super legislation and optimize your retirement outcomes.
• Compliance support: Our specialists help your self managed super fund to maintain current records in order and remain within tight regulatory constraints.
• Tailor-made commercial lending solutions: We help you evaluate commercial loans as savvy options to residential property, which in most instances enable enhanced returns and enhanced compliance flexibility.
• Investment strategy development: Our planners collaborate with you to create a diversified SMSF investment strategy consistent with your long-term retirement goals.

With the right guidance and structure, your self managed super fund can be a powerful tool to accumulate wealth and security.

Conclusion

Purchasing residential property within a self managed super fund especially if financed by SMSF loans is a costly mistake for most investors. The underpriced risks, lack of flexibility, and compliance problems can ruin your retirement nest egg. Prevent it by having efficient capital help you with expert SMSF lending advice, compliance support, and innovative strategies that grow and maintain your super in the long term.

Seize control, but carefully with the guidance of Efficient Capital.