Investing with an SMSF – what does it all mean?

Taking control of your finances and getting into pole position should be the goal for any Australian, and doing that with property investment is a great way to go. Nobody likes sitting at a desk all day, earning just enough to save here and there, but never really expanding to buy that investment home you've always dreamed about.

There are plenty of options for people who want to get onto the property ladder and take advantage of a seriously stable investment – after all, houses and units aren't as prone to major market fluctuations and so hold their value considerably well.

You might have an existing portfolio of five properties, although On Property reports that only 0.065 per cent of Australians fall into this category. However, 7.9 per cent of Australians own at least one investment property, and if you have enough money and want to set up a further income stream for your retirement, a self-managed super fund (SMSF) could be right for you. When you've gone through the process of deciding whether or not to set up an SMSF, enlisting the services of a buyer's agent from Cohen Handler will be a fabulous way of knowing what property to buy to give you the best returns on your investment.

Below is a raft of information regarding the possibility of using an SMSF for investment, who it will work for, how much money you'll need to make it worthwhile and how it can be used down the track. An SMSF is a great way to secure a property and earn money over time, however it can be an expensive investment and without taking the right steps and having enough capital on board in the first place, it won't be beneficial. Whatever you decide, getting onto the property market is a savvy move!

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Starting an SMSF – why should you?

Around 410,000 of Australia's 772,000 superannuation members are a part of an SMSF fund, according to ipac. Each month, around 2,500 new funds are opened, so they're clearly very popular. People are realising the true value of property investment and having a solid financial situation for retirement. Someone with five investment properties all tenanted, for example, could have an income of $100,000 after payments just from their houses and apartments around the country. That's an attractive prospect.

By starting an SMSF, it'll give you total control of your retirement planning. You have full responsibility for insurance, taxation plans and allocating assets, so you and the (maximum) three other trust members in the fund with you will always know what money is invested where.

You have the option to diversify your investing as well – with the funds in the trust, you can go into property, shares or cash, although there are plenty of restrictions around what you can use these for.

An SMSF fund itself can be reasonably expensive to maintain.

You aren't allowed to buy a property that you or anyone you know, is then living in or renting out. An SMSF property must be purchased with the purpose of creating wealth for a retirement in the future, and renting it out needs to be done to an unrelated party. You will also not be allowed to borrow money by using the equity in your SMSF, as outlined by the Australian Taxation Office (ATO). An SMSF fund itself can be reasonably expensive to maintain.

ipac suggests a minimum of $2,000 is required annually to cover costs, although SMSF Works estimates that cost to be as high as $5,000. If trust members are removed and replaced, that can cost even more, and having financial advice from a professional about ways to improve your strategies or allocations can be as expensive as $275 for every hour of the consultation.

This is one of the major factors in people not starting an SMSF scheme, as it's just too expensive to keep up with. However, if you have the money, it can be really rewarding. Typically, if the total value of your assets will be less than $200,000, the money you earn from the investment won't make the whole process worthwhile, including administration fees (if you don't know how to do it all yourself) and money going towards the retirement funds of everyone who is a member. Want to invest over $600,00? You're probably going to see good results, but start going over the $1 million mark and you'll be sitting pretty.

What do you have to do to set up an SMSF?

ATO outlines the major steps that have to be taken in order to set up an SMSF – these are important processes before you start investing, and making sure all of your moves are above board will save you in the long run!

First, it's necessary to choose who will be a member, or the members (up to four in total) of your SMSF, and who will be a trustee on the board of the fund. Next comes setting up the trust and drafting, editing and finalising the trust deed. Allocating this to a bank account with your funds in it and registering with the ATO is next on the list, before laying out an investment strategy and finally choosing when the SMSF investment will come to an end.

Once you've gone through that process, there are further steps to follow throughout your investment strategy's life. Rolling over your existing super into the SMSF is actually a good thing for many people, as it gives them a great start on the balance. You must understand employer contributions at this point, and the limits that are placed on these within an SMSF. Finally, you can start investing, but there are laws around this that have already been touched on. It's important to not 'evade' these, as hefty fines will be issued by the ATO and that may remove the benefits of having an SMSF in the first place. Every year, you should review your investment strategy, and must maintain records and documents, for up to 10 years in some cases.

The handy video from ATO below outlines all of this:

The closing stages of an SMSF include having a last annual audit, lodging the final return statement, paying any outstanding tax and distributing the accumulated capital to the members. This is when you'll see the fruits of your labour, and that money can also be rolled over into another SMSF if you feel like you're in a stable position. The amount of money you see returned at the end will, of course, depend on the sort of investments you have made over the SMSF period, and that's where a professional buyer's agent comes in handy.

What restrictions are in place around investing in an SMSF property?

The Australian Securities and Investments Commission (ASIC) states four main restrictions around investing in an SMSF property that you should be aware of.

The first is that the SMSF itself must meet the 'sole purpose test' from the ATO, which will show that it is for gaining wealth to retire only. The trust members are the only ones who will be benefiting for the period the SMSF is in place. You are also not allowed to acquire the property from a party related to anyone in the trust – that includes friends and colleagues. Once you have found a property that fits these criteria, you are able to start renting it out, although it cannot be lived in or used at all by anyone related to the members or trustees, which again includes family and friends.

There are potential tax benefits to having an SMSF property, so it's important that the ATO protects those who keep on top of their own payments legitimately too. If these restrictions weren't in place, a trust member might live on the property without having to pay rent, and still benefit from the tax differences, which would be unfair to anyone who can't afford to start an SMSF of their own.

Do you know what restrictions are in place for your SMSF property?Do you know what restrictions are in place for your SMSF property?

NAB reports that there is still a lot of freedom in using an SMSF to buy a property. You are able to purchase commercial buildings and earn money from businesses leasing space, and you can even get into the market of collectibles such as stamps and coins, if that's your thing. However, if you borrow money to make your existing super fund go a bit further and get into a more lucrative patch of real estate, you won't be allowed to make any alterations to the property until anything you have loaned is paid off.

That sort of restriction is usually offset by the fact that the ultimate responsibility of controlling your retirement savings is in your hands. Planning retirement and family estates becomes far more certain, and this is what many people are after. When enough money is poured into an investment, surely you deserve some sort of certainty?

NAB goes on to give a list of people who should be consulted at various stages of setting the SMSF up and before allocating funds into asset purchases. These people include a lawyer, financial adviser, accountant or tax agent, fund administrator and an auditor. On top of that, when getting into a property purchase, there are some key relationships to have around you.

Starting with a solicitor to make sure any required paperwork is filled out correctly, they will also be able to help you speed things along if need be. This would be necessary for buying a popular house with many people trying to get in on the action at the same time. If you can offer swift legal movement and the ability to get the whole deal sewn up in a matter of days because your solicitor is on hand, sellers may encouraged to accept your offer over another party's.

The second important person to have on your team is a mortgage broker. These people will be able to provide you with funding and a plan for paying that off, so you will know exactly how much you can afford and even how long it will be before you can make alterations to the property because your loan is gone. This will be important for buying a residence that your board members intend to renovate, because if the foundations of a home are changed to be used differently, say by adding another bedroom, the alteration cannot go ahead until your SMSF is debt-free. If you were fixing a crack in the ceiling or removing and replacing broken items that were important to the function and safety of the home, that's all above board!

Having someone advise you about where to buy will give you the best chance of making great returns.

Lastly, having a buyer's agent who knows the region in which your SMSF board wants to purchase is of the utmost importance. These professionals know the property markets and understand which suburbs, cities and states are showing the best growth, rental returns and capital gains, so having someone to advise you about where to buy will ensure you have the best chance of making great returns come the end of your investment strategy.

Whereabouts should you be looking to buy?

Once your SMSF is all set up and running smoothly, with all of the members and trustees behind investing in property and you've got a solid team of professionals behind you, it's time to start making a decision about where and what to buy.

Looking at yearly growth is a great place to start when considering what city to research. CoreLogic RP Data sets out the annual growth in median dwelling prices in its monthly indices – Sydney and Melbourne are, as expected, ahead of the crowd, with 8.93 per cent and 10.14 per cent growth respectively. Not far behind, however, is Brisbane (including the Gold Coast) at 6.38 per cent, so depending on where you live and how close you'd like to be to the property you buy, there are plenty of options.

How far would you be willing to travel for your SMSF property?How far would you be willing to travel for your SMSF property?

It's also important to have a long, hard look at what sort of property you'll be getting into – a house or a unit?

CoreLogic reports that the annual growth of a house in Sydney is 8.38 per cent, which is below the median dwelling value growth. However, a unit in Sydney has increased by 11.51 per cent over the past 12 months, and this might be a more attractive option for you. Melbourne, on the other hand, has much better house value growth than overall dwellings, at 10.79 per cent, while apartments are showing only a 4.68 per cent increase. In Brisbane and the Gold Coast, apartment growth is even less impressive at just 1.61 per cent, but houses are showing great strength with a 6.92 per cent increase.

Alongside growth, the actual value must also be taken into account, as this will be a factor in knowing what you and your SMSF members can afford.

The median house price in Sydney has shot over the $1 million mark to sit at $1,031,730 for the month of May, while a unit in the city is just $713,680. In Melbourne, the disparity is pretty similar, with houses sitting at $831,100 and units going for $523,100, while Brisbane, typically coming in third, shows a median house value of $560,260 and unit value at $394,250.

Growth and price are seriously important in ensuring that your fund will actually be making reasonable, if not fantastic, returns. A buyer's agent is the person to inform you of this. Regions that are growing in population will be in high demand, and so prices will shoot sky high. Suburbs or streets being developed will have a high price that might drop as the neighbourhood stabilises. Even city plans can affect how your property will perform in the long run.

Which suburbs are performing in the major cities?

Not only will a buyer's agent collate the above information into a shortlist of properties for your perusal and selection, they will understand exactly what you require from your piece of real estate. Being in an SMSF, the property will likely be held for a considerable length of time, which is why capital gains are so likely.

The CoreLogic RP Data Pain and Gain Report from December 2015 shows which regions experienced the best growth, and also how many properties were sold for a gain, and how many for a loss.

It's no surprise that 98 per cent of Sydney homes made capital gains, but Melbourne was able to keep pace at 97.5 per cent.

In a more specific sense, there are some outstanding suburbs in these cities too.

Manly, in Sydney's northern beaches region, is world-renowned for its surf breaks and fabulous lifestyle. Throughout 2015, a whopping 96.9 per cent of homes sold in the suburb made capital gains, and the median profit on those was a staggering $605,000. To achieve this sort of result, the average period a title was held for was 11.3 years. By contrast, the 3.1 per cent of homes sold last year that made a loss (at an average of $110,000) only held the title for 8.6 years. As it turns out, the longer you hold onto a property, the more successful you're likely to be, and that's perfect for SMSF purchases.

Heading south to Melbourne, there are similar results. Manningham, which lies north-east of the CBD, had 98.1 per cent of homes sold last year see capital gains at an astounding level of $555,000! These titles were held for an average of 12.8 years and, in contrast, the average length of time a property that made a loss was owned for just 4.8 years. These losses average out to $137,001, and when it comes to your retirement fund, you don't want to take such risk without having a professional opinion on hand for every step of the process. It could be a difference of almost $700,000 in this case.

Even Brisbane has crazy disparity overall. CoreLogic states that the 94.6 per cent of properties sold for a profit were held onto for 10.4 years and saw returns of $168,000. On the other hand, holding onto a place for 5.4 years on average could have seen you lose $28,000.

Making the right move on the property market will set you up for a very comfortable retirement.

Taking into account the amount that each property is worth, and how much you pay for it, is another great way of seeing which option is going to be right for you and your fund members. For example, a home in Brisbane that costs upwards of $500,000 but only makes a $50,000 profit on top of that over 10 years is going to be far less worthwhile than, for example, a place in Sydney that costs more than $1 million but makes around $600,000 over the same time period. That's great annual income, and on top of tax savings and the limited employer contributions, making the right move on the property market with your SMSF will set you up for a very comfortable retirement.

Is right now a good time to buy?

In the property market game, there's never really a bad time to buy. However, right now, the markets are very competitive, which is seeing higher volumes of buying occurring around the country. SQM Research released findings about the listings from April 2015 and 2016, showing the way the popularity of property is increasing.

Last April, 19,648 properties were listed for sale in Sydney, but through April this year, a whopping increase of 37.8 per cent saw 27,080 for sale. Melbourne saw much higher volumes, but less growth. April 2015 had 36,479 homes listed to be sold, but 12 months later, an increase of 8.4 per cent  meant 39,536 homes were listed.

So, while the market is competitive and cities are growing at rates never before seen, there are also a large number of people who are listing their homes, and that's going to be great news for your available selection.

That said, a buyer's agent from Cohen Handler can use their relationships with real estate agents to access off-market properties, but no matter your preferences, they will be working to ensure you find yourself as the title holder to exactly the sort of property you want.

It is your retirement fund, after all, and if you decide to go through with setting one up and putting up the money because it's going to be a viable option over the years, then you deserve to see solid returns on your investments. Property is a brilliant way to achieve this, and Cohen Handler is on hand to help out.

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