Property financing: Buying through SMSFs vs buying in your own name

Three years later, she has bought units in houses across different suburbs in Victoria, Queensland and South Australia, including Wellington, Leichhardt, Woodridge, Marsden, Bellmere and Joslin—all at around the same price range.

She said: “We haven't been looking at properties with large purchase prices and I think that helps from a loan approval point of view. We haven't really had any issues with obtaining finance.”

“Looking at cash flow and long-term growth, the properties that we've bought are around the same price point in affordable belts where there are, hopefully, plenty of people wanting to rent the places.”

In order to achieve the goal of setting up a financially stable future for her family, Ms Rita chased assets in growth markets to be able to realise the benefits of capital growth.

Right now, four of her properties sit within her self-managed super fund (SMSF) while the other three were bought under her and her husband’s name.

Find out how these structures influenced the way she grew her portfolio through the years:

SMSFs for property

As a legal tax structure regulated by the Australian Tax Office (ATO), SMSFs work mainly to provide for retirement.

This private superannuation fund can be used to invest in residential property as long as the real estate asset’s sole purpose is to provide retirement benefits to fund members. Therefore, the property must not be acquired, lived in or rented by a fund member or any of the fund member’s related parties.

If you have enough cash available, you can use your SMSF to purchase the property outright.

However, if you need a loan to fund a part of your purchase, you will have to comply to the limited recourse borrowing arrangement, which places restrictions on the use of borrowed funds like allowing the use of loans to purchase the property but not to make improvements on it.

Moreover, tax offsets can only be used against the fund’s earnings and not your personal income and the fund must always have enough cash to service loan repayments and ongoing maintenance expenses on the property, which is why holding assets within SMSFs tend to cost more.

Although seeking loan approvals has remained easy for Ms Rita because of her choice of low-cost properties, it has become harder to maintain her assets sitting within SMSFs due to increasing interest rates.

To mitigate risks, she engaged with professionals who will help her ensure that she consistently makes maximum contributions to her super fund.

Aside from being a big help in auditing and keeping on top of all the numbers and documents pertaining to her assets, they have also provided her the guidance to make the best financial decisions for her wealth-creation journey.

According to her: “It's well worthwhile having that conversation around the benefits of investing in super and what the maximum contributions you can put into your super fund every single year to make sure that you can either acquire property within your super fund or, at least, maintain it through contributions —sometimes a bit of both.”

Moving forward, the investor has started looking into diversifying her portfolio by incorporating other finance structures.

“One of the things we did when we set up was taking out a line of credit. With SMSF, we’re using our super, but we're not getting any more in our super—four's our maximum. We will leave it at that and look at other ways to finance our assets,” she said.

Purchase in your own name

In contrast with using SMSFs to purchase property, buying assets in your own name entails a more straightforward process, which is why it is also the most commonly used structure in the property investment landscape.

For most investors, this structure is the most simple and cost-effective way to build a portfolio.

However, keep in mind that your assets may not be protected from tax liabilities, such as the additional income tax for rental returns earned.

This structure is best for investors who want full access to negative gearing benefits and possible land tax savings, as well as the eligibility for capital gains tax exemptions should they decide to sell their assets.

At the moment, Ms Rita and her husband have three growth assets bought in their own names.

According to the investor, while it’s ideal to have a positively geared portfolio, they will continue to chase capital growth until they have established a good and solid nest egg of assets.

The investor explained: “We're definitely looking at capital growth and not so much at the cash flow at the moment.”

“We'd like the portfolio to be positively geared as much as possible but, for us, it's all about capital growth and knowing that we're going to be set up for success in the future rather than just for the now,” she highlighted.

Which is the best structure?

Aside from buying through SMSFs and in your own name, investors can also use a partnership, a corporate entity, a joint venture, a trust or other sophisticated structures to fund their property purchase.

All of these structures present various advantages and disadvantages, which is why, at the end of the day, your final decision must be based on your personal circumstance, including your goals, capabilities and limitations as an investor.

Consider the purpose of your purchase in line with the long-term implications of the structure you’re looking to use to avoid unnecessary changing of structures, which can lead to losses due to additional costs incurred.

Moreover, you must keep in mind the protection of your asset, the rules of taxation, your potential exit strategy and all associated costs.

Finally, seek the guidance of the right professionals to understand all aspects of property investment—from the fundamentals to the legal, financial and tax considerations.

Tune in to Ms Rita’s episode on The Smart Property Investment Show to know more about the processes and strategies she used to grow her portfolio in three years.

This information has been sourced from the Australian Taxation Office, the Australian Securities and Investments Commission and the Smart Property Investment website.

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