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Building property through super – A simple strategy Posted on October 9, 2018
The Retirement Strategy
An investor finds a property they’d like to live in during their retirement. They use money in their self-managed super fund as a deposit and enter into a limited recourse borrowing arrangement to complete the transaction when the property development is completed.
While the property is owned by the super fund it’s rented to third parties for a market-based rent.
Upon retirement the SMSF members start a pension and sell their current family home. They then use the proceeds from the sale of their home to buy the property from their SMSF at market rates.
The sale of the SMSF-held property is capital gains tax free because the fund is in pension phase. When the transaction is complete the super fund has liquid assets to pay their retirement income.
It’s a simple straightforward strategy.
They love the beach about two hours’ drive from their home and think that retiring there would be perfect.
They find a property developer who is selling small blocks of land with a new two-bedroom house for $350,000 each. They use $150,000 in their super fund, which also borrows $200,000 over 20 years. Current loan repayments would be about $1600 per month.
Ideally they would like to have someone rent the property long-term but if failing that they would rent it out during summer holidays.
Each year, Jack and Sally’s employers contribute $10,800 per annum – $9180 or $765 a month after tax – to their SMSF. The remaining $50,000 in their super assets will earn another $200 a month. In total their super fund has an income of $965 a month.
Each month they need net rental income of $635 ($7620 a year) to make the strategy work. They will also need between $2000 to $3000 to have their super fund’s accounts, annual return and audit completed.
So in all they need $10,600 a year rental income to make the strategy work. They would expect a long-term renter would pay them $300 per week or $15,600 a year.
With holiday rentals they think they could earn about $12,000 a year.
As you can see it’s an evenly balanced transaction. All they would need is falling rental yields or no rent or higher interest rates and they would find life tough. They could help this process by contributing non-concessional contributions to super each year.
They could make life simpler if they had only a $100,000 to $125,000 loan in the super fund.
Let’s assume they enter into the transaction any they’re now retired.
In 20 years’ time their home would be worth $1.5 million and is debt free. The market value of the super fund’s property is $1 million and the loan has been repaid.
After the super fund’s loan was repaid the asset was transferred from the holding trust to the super fund.
They start two pensions in their super fund.
Jack and Sally sell their home and use some of the proceeds to buy their retirement home for the market value that, under rules that will be in place from July 1, have to be determined by a qualified independent valuer.
After they complete the purchase of the new home they invest their super funds in a range of appropriate securities that generate sufficient retirement income.
This is a simple yet potentially highly effective strategy for many people.