Mary Benton: How To Buy Property In Your Self Managed Super Fund
On today’s episode,
Bernadette is going to share with you an exclusive sneak peek into one of the recordings of the monthly training inside our membership. Mary Benton is the presenter, a financial planner and a student in The School Of Renovating is going to discuss How To Buy Property Into Your Self Managed Super Fund.
A super fund is a Trust with no end date. Holding assets for beneficiaries with lower tax but with restricted access.
Listen to Episode 15 Mary Benton: How To Buy Property In Your Self Managed Super Fund
Podcast: Download (Duration: 47:04 — 86.15 MB)
- Why would you own a property inside a self managed super fund?
- How much do you need to get started?
- The process: With or without borrowing.
- How does it help when you are in a renovating business.
- The current landscape and other issues.
- Why property in super can work
- How to acquire a property in a super fund
- Advantages of a self managed super fund
- Steps in self managed super fund borrowing
- The life cycle of a self managed super fund
- Which clients are the self managed super funds suitable for?
01:30 - Self managed super funds are a bit of a minefield
02:33 - The things that work or don't work
02:58- A super fund is just a trust structure so it's not the actual legal entity
04:52 - Why should you own property inside superannuation?
05:56 - The banks are very happy to lend against property, against bricks and mortar
07:40 - The most important rule in any self managed super fund is called the sole purpose test
08:23 - The advantages of a self massive super fund itself is that it does give you control.
10:25 - How much money do you actually need to get started
14:51 - You cannot borrow to renovate
18:30 - The purpose of the property has to be for commercial purposes
20:37 - A thing called Safe Harbour rules within the Tax Act land
23:10 - Obviously the lenders, the bank etc... hold security over the property
25:14 - There's a minimal risk to the bank effectively.
26:38 - Super fund can run a business in certain circumstances
29:35 - A lot of uncertainty and that uncertainty is actually slowing down the whole housing market
32:54 - If labour gets in and start changing some of the rules, we might not be able to borrow
34:23 - It makes complete sense to have to buy and hold properties inside a super fund
36:26 - Can you buy with vendor finance through your self managed super fund?
39:55 - Can you buy a unit with borrowing?
40:45 - Banks make their money out of lending. What's going to happen?
Get "Episode 15: How To Buy Property In Your Self Managed Super Fund" Show Notes and Transcript
Transcription“What happens psychologically is people they'll sell shares in a moment's notice because they're liquid, that they won't sell property. So you hear about a lot of property millionaires but you don't hear a lot about share millionaires. And that's because of the psychology when we actually go about purchasing that type of asset. So a property to getting in has high costs stamp duty etc... Is chunky capital gains on the way I can't just divvy it up and very liquid. You can't just sell at a moment's notice unlike shares.
The difference is banks love property. So the banks are very happy to lend against property, against bricks and mortar.”
Well hello it's Bernadette Janson back with she renovates the podcast for women who want to create an income and a life they love. And today we're doing something a little bit different.
So basically the topic is buying property in your self managed super fund and what I've done is I have brought in a recording of one of the trainings from inside our membership. And this the presenter is Mary Benton who is a member of our community. She's also a financial planner and chartered accountant.
Now self managed super funds are a bit of a minefield. You really do need to work with someone who knows what they're doing and. And so Mary is going to shed some light on what's possible at the moment with them. Important to note that this information that is general in nature and should not be taken as personal advice. You need to get advice from your own specialists your own financial planner or accountant. That relates to your personal circumstances to make sure that you make the right decisions in your property journey. So thank you. So I'm going to hand you over to Mary now and I know that you're going to really enjoy this.
Bernadette: OK so we've got Mary Benton on. I think for those of you who didn't read the intro. Mary is a renovator first and foremost. She is a financial planner and she has her own business and she is also a mortgage broker. Have you got any other strength in your boat Mary?
Mary: I'm a chartered accountant as well. In Wales and Australia.
Bernadette: There we go. So yeah she's the full package based in Melbourne and she's on a steep trajectory to improve her own financial position with renovating. But tonight she's gonna be talking about buying a property in a self managed super fund. And I'm really looking forward to it. So thank you Mary.
Mary: All right. So guys let's get into it. So self managed super fund, some of you might already have a self managed super fund. Some of you might be thinking about a self managed super fund.
But generally with the community that I'm talking to each night, the reason we've been looking at it is to buy property and hold property through it. So I'm going to take you through some of the things that work or don't work and why sometimes super fund might be good for you. If there are things that I don't cover we get questions at the end you can always ask. Or as I'm going through any questions on any slides please ask me. Some of that I will go through quite quickly because they don't matter too much and it's not so important and some of it will be going through individual detail.
So for those of you don't know a super fund is just a trust structure so it's not the actual legal entity super fund it's just a trust, but unlike normal trusts which have an 18 year life a super fund has no end date.
If you could make it that the beneficiaries keep changing over it. So it never quite says it can keep going. All right. So what we're going to go through today is why would you own property inside super fund in the first place.
What are the benefits of that? We're gonna look at how much you need to get started. That seems to be the big question on everybody's lips as well. How many dollars does it take. What's it cost to actually maintain it as we go along. And then I'm just gonna take you through the process if you buy property and renovate with and with bank borrowings.
Some people actually have enough investments already inside that super fund to not have to go to the banks, but either way let's talk our way through what happens. And obviously because I'm talking to a community of renovators we want to look at what can we do in terms of renovating, if we want to renovate property that's inside someone's super fund. Do we like to or not. Because it's a few questions around that and again I'll give you some guidance and then of course we've got a looming election which has slowed up the market which we all know. I've got my house up to sell at the moment on the streets up to sell etc...
We know the market's going really slow and that's because of the pending elections and the changes that are likely to come if suddenly a federal labour gets in. So we'll have a quick look at that as well to see what might happen in the future.
We're kind of a company called Plan4wealth we're based in southeast Victoria but I travel all over the country and I have to give you advice warning I'm going to be talking to you today in general terms if you've got specific questions I'm supposed to not answer those specific questions. But I can just send you a link we can cut telephone chats and then we can go through it personally anyway.
All right. So let's take the first or why should you own property inside superannuation in the first place. Well those of you who don't know property itself actually has a lot of advantages over shares when you look at properties. I'm talking to who converted to a real property investors. We know that anything that you look at statistically that says here's the returns on property purchases the returns on shares show pretty much that the returns are about the same. If anything shares might actually have a slight advantage it actually make more returns on the property.
But what happens psychologically is people they'll sell shares in a moment's notice because they're liquid, that they won't sell property. So you hear about a lot of property millionaires but you don't hear a lot about share millionaires. And that's because of the psychology when we actually go about purchasing that type of asset. So a property to getting in has high costs stamp duty etc... Is chunky capital gains on the way I can't just divvy it up and very liquid. You can't just sell at a moment's notice unlike shares.
The difference is banks love property. So the banks are very happy to lend against property, against bricks and mortar. You know sometimes you have to look at the banks and wonder why they do half of what they do and at the moment they're definitely tightening it up. That's one of the advantages of property even inside super. So that's why we love property we know we can get extra value out of it.
But inside secret sales, members inside someone's super fund can own. In Australia can own direct property. There's certain restrictions but you can pretty much own direct property inside the super fund, which means you get access to all of the tax advantages and you can borrow from some of them still to buy property. The reason that you wouldn't buy obviously is that when you do buy property you're going to use all of the cash to buy a property or most cash anyway so you're going to use your portfolio if you imagine it should be balanced across cash shares and property.
There's gonna be a time where it's overweight property but if you buy really well and you know what you're doing that's not going to be an issue for those of us invest in property anyway. We love property so we know exactly what we can do that you do have restrictions is how you can use energies in liquid etc.. We know that say you must make sure before you buy property inside a self managed super fund that it's going to work for all of the members.
So I'll give you an example where me and my ex-husband split up and we have two properties inside our super fund at the time. And we decided it was any of the services members who wanted to sell or close down the super fund, because he didn't want anything to do with any of my investments and more we had to sell the property that was in there before we actually closed end funds that took a number of years to go through all of that.
You just have to be very careful how you do it and there's some rules around that you must watch. The most important rule of anything in any self managed super fund is a being called the sole purpose test and that's where you have to make sure that the purpose of the goal of the asset investment is for the sole purpose of providing for your retirement.
Now if you're in a fund that's got adults and children, then it might be that the property works because it's liquid it might work for the children it might not work for the parents if they want to draw income off it etc.. So you've got to make sure the assets will actually work for people in the fund. If you are maintaining a property as well you know that you would have a lot of costs of repairs and maintenance as you go along and you've got to make sure you've got cash flow in place and liquidity to be able to move all along.
The advantages of a self massive super fund itself is that it does give you control. It gives you flexibility over exactly what you invest into and anybody that already has a self managed super fund will have gone into that deliberately. So that they can have more control over the investments they've got and over the timing of assets and what they do with their money.
It does potentially have less tax over time and it has lower costs over time as well. And with a self massive super fund you can invest into direct property and definitely business property and residential as well. So you've got those extra advantages and holding real property is suited to real estate investors in particular but be very careful if you're planning to buy for instance residential properties. You cannot let related parties use or lease that property. You've got to be really careful that.
You can't purchase off what's called the major parties and can't sell it to a related party. The business real property on the other hand you can actually deal with yourself. You can sell your own property or your factory or something to your self managed super fund and that works really well with traders and people who are in business real property so that things like shops and offices and farms, you can also still borrow to buy that property too.
If you're fed up with paying rent for your business and you want to come by the office for instance and you've got money inside your super, inside your self managed super fund choose the money in it to be the deposit. You can go buy your rent office space and then what you do is you've got the other advantage that you're still renting it. You went to an office to sell and you can rent yourself still upping the amount of money you get it. So if you are in any situation where you think that owning commercial property works for you it's a real little bonus to have a self managed super fund.
All right. So that's just why I would own property, I'm talking preaching to the converted because you only know that you love property as an asset and you know you can make money from it inside the super and tax refund. So you know all about it.
But how much money do you actually need to get started when you're putting money into it? Because the current rules allow trustees to borrow and that has not changed even though the banks have decided to be a bit stupid. It's actually known as what's called limited recourse lending. So when the bank lends money into the super fund they have to lend not to the super fund itself but to a what's called a bare trust that holds the property on behalf of the super fund. So it's a trust which was below the super fund trust and the banks if they lend or whoever lends into a super fund is limited to the assets of that separate trust.
Let's say you default on it, you borrow a million dollars and for whatever reason you default on that loan. All the bank can do is go after the property that they secured against they cannot go after any of the other assets of yourself in the super fund.
And this is the way that the governments end up so they could protect themselves against having their assets taken away in case for whatever reason markets go bad or things turn around and they can't make the payments they didn't want to jeopardise everybody's retirement. So the bank takes extra risk in that case when they lend into a self managed super fund because of the extra risk the banks tend to charge a higher interest rate at the moment ridiculously high. You see them reading that tweet and send used to be there around 6 - 6 1/2 %. But at the moment there's a lot of banks that are pulling the rates up because they can cause.
They lend as well as a very low Loan To Value ratios or LVR and most banks some lending below 60% but most of them are around 60%- 65%. There are still some lending 80% but you will not get above that. So commercially they will lend less capital to their risk in case you default and they will charge you more for the purposes and they will also charge you very high fees twice as you set the loan up.
For example if you go to buy against your home you might pay $350, $600 to the bank for setting up your loan. If you go into self managed super fund it could be $5,000 so you need to know those extra costs of getting in and borrowing a lot higher. The good news is you can borrow from a bank or a related party. So mom and dad can actually go and borrow against their home and then put that money into their self managed super fund and the mom and dad can actually become the bank to the loan and so on.
But even then the tax office just said that we need to be very careful commercially about the interest rates that we're lending, growing up. And the repayment terms that we lend or borrow for. But it's a way of making sure we would use that as well.
So that's where borrowing sits at the moment like in terms of what the banks are looking for when they go to lend you against that property. They still want you to have around $200-250k in cash before they'll lend you money on top of that. They don't have to use all of that for the property but they want to see that you've got a certain amount of money left over even after you've bought property.
I've always said to consider if you haven't got between you around $200,00 or that you've got the capacity to get to $200,000 very quickly. Then let's not look at doing self managed super fund just yet, because it can cost you at least you $2,000 a year from the fund even if your borrowing from property.
That would be about 1% fee if you got $200,00 which you really want to try and stay around 1% as possible, but the bonus of a self managed super fund is that you can have up to four members and there's talk of increasing that as well.
Across all 4 members that's $750,000 each. So it's easy to get together with a few of the people and put your money like moms and dads and the kids put money together and get to $250,000 to get started.
You really need to allow in that, enough money that whatever property you're planning to buy you've covered off fuel. Let's say 30% deposit that same 5% stamp duty and then about 2% on top of that for anything. The banking system has never been one to charge you.
On top of that you need to have a little bit of money left over so that you can pay for ongoing costs of the fund also be current and assets in the tax offices every year. Now the one thing about the boring rules and regulations in the very tightly controlled. Is that you cannot borrow to renovate. So if you're going to improve a property you have to already have that cash sitting inside the super fund. So let's say pops is going to cost you a $1,000,000 and you've got to put $300,000 and you've got another $50,000. Stamp duty would have cost another couple thousand, $20,000 save for borrowing costs or both. You might therefore need to have about $370-$400,000 thousand in the fund. But it's going to cost you a $100,00 to renovate you need to have that as well. So you need to have another $100,000 or $200,000 in terms of sitting there.
And the reason I put 110% here under renovations is that tension contingency number because nothing ever cost us what we think it's going to cost us. We always reliable. So we have another 10 percent to cover off those contingencies as well. So that's pretty much what you'd need. You cannot be seen to be borrowing from renovations.
That's how much dollars you'd need, again anybody's welcome to visit the sites to recalculate if you want to. The process that you go back buying property inside or outside of a super fund. If you've got a commercial property. You can buy it from a related party, you can buy it from somebody external and you can obviously lease it to an external party or to a related party.
But if you've got residential property you can buy it by a super fund, you can use it to an arm's length person but and you can borrow against it. But you cannot buy it from a related party, you will live in it or have anybody living it. So quite often I get asked the question, I've got teenage daughters and will go to university, I've got money in one super fund. I'm thinking of buying an apartment in the city so that they can live there. Whatever you need that's fine in your own name but you can't do anything and you've got to be careful. But inside a super fund it's nuts. You just can't and don't think that they won't find out, because it's not something you want to raise.
The penalties if you get it wrong and you breach the sole purpose test or one of these tests. If the tax office can actually charge you 47% of the value of the assets of the fund as a penalty. So if you've got $5M self managed super fund it doesn't matter that you've only breached your $10K. They can come after you for pretty close to $2.5M of that $5M as a penalty.
If you want to go about acquiring what we call business real property so commercial property and want to acquire it from a related party. You can as long as it is commercial property in the same test somewhere. It has to be the dominant purpose is that it's used for commercial use. So for business purposes it doesn't matter whose business lease it could be yours it could be somebody else's.
But it has to be dominant purpose and this is one of the things that the Royal Commission brought up and I was completely confused by because they talked about bed and breakfast and said that it was able to be owned anyway by itself on super funds because the owner was actually going to need to move over breakfast. Well that's perfectly acceptable under the Tax Act. The person living there would be using say a managers like one bedroom over the five or we have got and if they're living there is incidental to the management and the ownership of the property. So that's actually in light of the Tax Acts that initial well because afterwards about that I think that was more about the fact that was the start of a line to be honest.
The purpose of the property has to be for commercial purposes and then anybody can rent it whether it's related policies or an external policy windfall. So that's whether it's office, shop, factory or farm section.
Just as an example lets say we were renting something because again this matters with Airbnb a property for instance. If we've got a block of units and there's 20 units in the block and that block of units is basically being managed as a business, because the rental is the full time property rental business then that actually is a commercial property. It's in the business of renting out a property it could be we're Airbnb it on a large scale.
But even said these examples the units in that block. And even if the manager and then the manager is rentals that's more like a passive income so that's like an investment property, that's not commercial. So the property itself like the residential but it's not going to operate as a business therefore it's not commercial property. So if you're in debt with any of this you can go to the Tax Office and get a private unit.
The last one, the bed and breakfast there's one bed and breakfast but four bedrooms in that out of five member one lives full time. It's just incidental use still considered to be commercial so can be owned by acquiring self managed super fund from who yourself and it can obviously be then borrowed against it.
I think I said this before but obviously banks lending but they're just getting out of it quite rapidly at the moment. For some other reason. Following the royal commission I wouldn't be surprised if it gets inside knowledge of what the hell's going on.
Because the whole Haynesville commission report just didn't make a lot of sense on a low scale so it sounds like the government banks are in cahoots but will find them out. But even if the bank lends or it's borrowed from a related party like yourselves there's those related parties or the commercial loans have to be announcements on commercial terms.
There's a thing called Safe Harbour rules within the Tax Act land that spells out what those arm's length terms are and the arm's length terms include the terms and repayments as well as the interest rate. If any loan does not meet those rules then it's deemed, well they can just shut it down straight away and they can penalise you. You just need to make sure you're meeting the Safe Harbour rules and that includes even if it means back pain interest etc... Be very careful when you do this just make sure it complies.
But again if a mom and dad is lending in, let's say you borrowed at 4% and you lend to your super fund and you have to charge your super fund 7% for instance because that's the right loan something like 5% it just means that the super fund is paying you back quicker. It's not a problem with the fact that you're having to restructure your loans that way if you're lending because your cost is actually still lower.
Here's how it works the bank makes a loan to the self managed super fund itself, self managed super fund already sitting on loads of cash in a bank. So the super fund will add that loan money to its own cash goes through what's called a security trust or bank trust which only is set up. So who owns this property on behalf of a self managed super fund because a super fund itself is not legally allowed to buy. So put some money on a bare trust figuratively it does mean that the bank account is all on paper.
The bare trust then goes and buys direct property and the security trustee owns legal ownership of the property and after the loan is paid off the property goes back to the self managed super fund and so bear trusts it disappears.
Its sole purpose is to own that property for the period of the loan and then it just like dissolves and the property goes back to the self managed super fund. And that can cause some issues in some states particularly Queensland where when the property changes from the ownership of the bare trust back to the ownership itself the self managed super fund the State Revenue Office decided that it wanted to tax it again for duty purposes.
So there are some very clever lawyers up in Queensland who have managed to get around that. So if you're going to buy property in Queensland then you must contact somebody before you do it before you even get to signing an offer or a contract to sell not even before signing up to full sun contracts sale. Otherwise you can be up for double duty. Be very careful about that.
And then obviously the lenders, the bank etc... hold security over the property. Only limited recourse alone cannot go after any of the aggressive self managed super fund, so it's all good. If you were going to buy a property and borrow to do it you'd need to make sure that the property itself still went through the normal borrowing requirements. The bank still has to like the property, has to think it's worth the money, has to think it's a good value, you would have to think it would be able to sell etc etc...
Then you have to make sure that your trust deed is going to land borrowings otherwise you just have to. You set up your trust, your security will bare trust and then and only then you went in the contract of sale.
Because in Queensland in particular you have to have the trust in place before you can sign and execute a contract sale. Otherwise it's deemed contract to sell at some point because the trusted deed put at the time. Places like Victoria you can just sign and or nominate and set the trust up later, but you can't do that in Queensland. Then you execute all the land documents, settle on the property as per normal and you just be careful of stamp duty in different states.
So the actual purchase of a property is no different. If you find it in your name you just buy it with the trusts that you own. So what do the banks want? As per normal, they look at you to see whether or not your trustworthy or a credit worthy customer. They're looking at either you because you are borrowing against your own home or they're looking at the self managed super fund as the borrower.
And this is where it used to be really good for the tightening at all because then all we had to do was show that the self managed super fund or your super funds had been receiving super contributions at a certain level for the previous 2 years. Those new super funds and they were going to receive contributions and you just had to show the current assets and then what the rental was on the property and so was all of that combined to support the amount of the repayments and the borrowings by what happened it was a really simple expense.
There's a minimal risk to the bank effectively. Because their only lending somewhere between 60% and 80% and they charge a really high interest rate. From a liability point of view this is a safer bet for them to service you than it was to even lend you money against your own home or something because it's mandated knows about how much has to go into super long enough and what you're getting et cetera. So there was a really good track record.
It's good if it's true, but the banks since seem to have tightened up on all of this and obviously they've demonstrated the savings just like normal is. Shows the liability to service the loan and the like to a certain amount of cash left over so I know we could get into difficulties.
You've got enough money say to pay the 1st year's worth of loan repayments so let's get back into the current landscape rather being backwards. But let's just talk about renovating per say because we are The School Of Renovating and what limited recourse borrowing does or within a superfund.
Super fund can run a business and in certain circumstances, but what it can't do when it's got a borrowing arrangements in place. It's got very strict restrictions on what it does. It has what's called a single acquirable acid test. So if you buy a 3 bedroom residential house for instance there are rules that say that it has to stay in residential hands. You cannot change the nature so you can’t bulldoze the house and sell the land to a second land. You can't buy vacant land and build a house on it because you've changed the nature of the asset from mum to house of nice to land that you could for instance renovate from 3 bedroom to 4 bedroom. You could put a swimming pool in the garden you could put on a double garage because it's still a house, a residential house.
When the tax office talks about the nature of an asset they're actually quite good.
When you talk about it it's actually really good and there's sections in the ACT superannuation that in some sections A & B which actually goes through all of the examples of what they mean by this. It's a really good section. Lots and lots of information. If you're confused just go through that section. The only thing is you can't borrow for those renovations. So if you were buying a place and you needed to repair it then potentially you could repair it with borrowed money at the time but you can't improve the asset with borrowed money. You have to have enough savings and are enough when you get an extra contributions and to keep it to be able to do those carrying out those improvements.
That brings us to a slightly different issue and that is that getting money into super in the first place can also be an issue. If you've maxed out your contributions in super and you need to get the money in there to do the renovation you've just got away.
Because if you renovate it with your own money outside super it will be a deemed contribution and exceeded the caps and you won’t be able to get the tax deductions you could actually be penalised. So if you don't have any lines whatsoever you can just go ahead and renovate. No problem because you got money in again you can just do the renovation not worry about it. But if you have got borrowing against it make sure that you aren't borrowing any more money and aren't going to renovate. As I said go through the sections of the ATR regulations as well 2012 and just check the changing nature of the assets.
I’ve put in there the business side because I know that's one Bernadette that you like to look up in Queensland. If you bought yourself a double block that was a split earning then took the property moved it to one side and they got block land and you've got a house you've just changed the nature of the assets finds itself one circumstance. So that one wouldn't work through super but you could buy any other property. And like many for instance you could improve it and then sell it that will be okay through super as long as you got the money inside your super fund to improve it.
Just on the current landscape I have gone half an hour so I'm going to start bringing it to a close. I just want to go through some of these and have some time for questions. At the moment with no bill on the sidelines waiting champing at the bit to get into government. It's a lot of uncertainty and that uncertainty is actually slowing down the whole of the housing market not just it's actually slowing down to be honest.
There's been no change whatsoever to the legal rules about what's going to land on self managed super fund. We can still have what's called limited recourse borrowing arrangements, we've still got the single equitable asset restrictions while the bones in place and we know in Australia we have a growing need for housing etc... so it's not like anything's changed. Nothing's changed but the whole housing market slowed down because not only is Bill climbing to potentially remove negative gearing which could crush the whole housing market it is talk of them stopping the ability for super funds to be able to borrow at all anyway so to do this we need cash and we need quite a lot of cash to buy properties.
And because of that banks are pulling out of the lending space. That's after Sydney after the gold commission. They're very very gun shy in terms of borrowing. And like I say the stuff that came up in the Commission ran itself and seek funds. Technically they were allowed to do that.
That was done only for those of you don't know the story of the people I heard as I heard it and that was a Scottish lady in tears because she went to her financial planner first and we've done it and she approached the bank, a lot financial planners suggest no problem. You can borrow inside.
You can set up a cell phone and it’s different to a bed and breakfast which is which kids do. And you can borrow for that purpose. So his planner apparently told you can't. I tell you no. His planer was wrong. He was correct. That's not the way it was painted in the commission. The problem was she then went away and sold her house and gave up her job and then went to buy the bed breakfast. And at that stage the bank which in this case was Westpac said well why would we lend to you? You've got no income.
We don't know how you're going to run this business. And so they said no to the loan. So she's in tears then because by then she sold the house can't start with business etc... Wherever this stuff came up which is probably a breakdown between the bank borrowing and the approval that the technical thing about she could have bought herself a bed and breakfast with something different and borrowed to do so was which was correct. She could.
But anyway, partly because of that I think banks are withdrawing their funds lending space is seen as too risky. They never understood it. I'd have massive arguments with their legal departments. When we were going through it to explain to them the rules set in them somewhere. And I think that's basically why they're withdrawing its hold snow level commission. Just don't want to do that on top of that we are getting things like 15 year terms or higher interest rates so it is actually damping down on the whole property market anyway.
And if as you say if labour get in and they start changing some of the rules we might not be able to borrow any way it's going to restrict a lot more. But you will still find that where people run businesses and they have plans to move commercial property into something safe and it makes absolute sense and it's a good thing to do. But I can say it's causing a lot of uncertainty in the whole housing sector. Those of us sitting on the sidelines won't sell which is stimulating.
I think if you organise sort of self usage from this sort of thing is going to do. Obviously setting up a self managed super fund is among the things that go into that in the first place. If you then decide you want to buy a property and one for borrowing you've got a so-called borrowing and that's a separate stage. Buying the property and a lot of things to do it now and then obviously you start your investing and you've got your own ongoing as well with a super fund.
You've got a lot of things on that basis to look after but look at it this way if you are a property investor and you already have a property you used to rent that you used to renovate etc... You're going to be putting in tax returns in a year anyway you're going to be collecting rent because you're used to paying rates and repairs and things. It's no different it's just you're doing it in separate legal and saying you're responsible for keeping the books. There are some people walking my doors that I would say you should not be setting up a cell phone system because it coming into their own personal tax return or pay any employee but anybody that's got a nice middle eastern women owned business is definitely suited to connect to run itself. So suitable for clients have enough money and are happy to take legal responsibility for looking after the books.
You definitely have overseas legal capacity and if you decide that you want to own property and you have to renovate you can make rules by holding property inside and someone to ship and make absolute sense. When I'm looking at clients and I'm talking to less about 20 year olds that are coming to my office and they want to do it. They can set this as a goal for later when the 13th is they can use this to look after 6 long term investment properties long term investment.
It makes complete sense to buy and hold properties inside a super fund especially if you've been content to buy, this makes a good income option. It's not so good if you want to be churning it or using it to develop because you got to be really careful about the rules on rent money on the super.
It's definitely not suited for people who are time poor who don't understand the legal complexity and you don't even want to be involved. So yes. We've got lots of paperwork and copy time or you just got to be careful are possible to do that. So just be careful of how you get money and how you access money and of the penalties.
If you're getting close to each well these dates really sure we know people for July 2015, 2016, 2017, so up to anybody born before basically June 1962 at the moment or anybody really. For June 1964 was so close to Canal to access your superannuation and having it in itself and the interest and property that you make.
So don't get it wrong because it's not worth it penalties up to 47% of the fund's assets. Just keep a check through your accountants as you go along but otherwise we're looking at its long term tax effective investing. It can be complex but at the end of the day if you are the least competent you could just navigate carefully and just know that it's not for incompetence.
Bernadette: Awesome. Great. Thanks so much Mary. Actually I've got the first question. So can you buy with vendor finance through your self managed super fund?
Mary: Well because it's super fund pretty much. You can only sign one contract. You can't have more than two payments so you couldn't have more than a deposit. And secondly. So if you think then to finance normally that's where you would do it more than two payments so you might have a large deposit and that's okay. And the balance paid like 2 years or 3 years later or something. But if you can set it so that it’s 2 payments to pay something that, yes if you set it so it's more than 2 payments. But if you're by borrowing from the bank the bank will be paid payments.
That's loan repayments because you get owner. So when you do it then also you will say not say not instalments. You have a lot of farming clients around me. So I have my farming costs will sell a farm knife or down payment and then they'll have two or three installment's over the next five or 10 years and they'll sell them for you know two million each time and every time you do it you have to go back to recalculate your original price additional capital gains tax. So if you're buying through a super fund you wouldn't be able to do it that way. But what you're saying is if the vendor wants to be the lender yes and then yes the vendor can absolutely.
They just have to meet those possibles probably I have to say what that me interest rate and they have to meet the terms and make sure it's less than 15 year term and they're charging interest at the proper commercial right. Yes fine. Anybody can be a lender.
Bernadette: Right. I found that really helpful. I know of some people who are doing renovations who are doing flips and they're self managed super fund. And I always wondered whether that was how they were doing that because I know you're not meant to be conducting an enterprise and clearly they're breaking the rules because you support that.
Mary: So the way that I do it, a super fund can run a business you just have to be really careful like a company to actively trading. So you just have to care for not always go and get advice or get an actual private ruling on it just to be set.
But if you say you're flipping and you're flipping every year or 2 years or something then you could say it's just an investment, normal just turn over profits.
If you're flipping every 3 months, I think I'd be a bit careful because you are a developer and you crossed the line and you have to be really really careful on showing that you're not using borrowed funds to do certain things, you're not using assets inside super funds etc... It's where you mix borrowings and anything you have to be really super careful.
But here's how I usually advise clients is quite simple. There are some properties we buy which we intend to hold on to for a long time. And there's some properties we intend to flip. So if you're going to flip them or do them in your name or adjacent to the company because that's showing the income. And that's good for when you want to service debt. So the things you’re going to flip you want to have a little personal company and withdraw from it. But if you're planning to hold it long term and even if you Airbnb it if, you're going to hold it long term and keep business because way you can always change your mind. Say really get a really good office so you decide to sell it doesn't mean you got to keep it forever. I just distinguished my property portfolio between what's going to generate income and turnover quite quickly I'm keeping the company and what's a long term hold I'm putting my super funds.
Bernadette: Can you buy a unit with borrowing? Renovate yourself within your super fund say within six months?
Mary: Yes. So you can buy a unit with that borrowings, renovate and sell. Yes you can. If you did it a few times over to the Tax Office and say you're definitely running a business then they might try and tax you differently. But if you do that once and then the next when you hold for 5 years or something they're not going to think you’re running a business by doing that.
Bernadette: Yeah. So that's not something you could do on a regular basis.
Mary: You just have to be careful because they're going to come back and say they want to tax you differently on revenue.
Bernadette: Yeah. So just another question been around the environment at the moment. So banks make their money out of lending money. What's going to happen?
Mary: Well at the moment banks have decided and they're making crazy decisions at the moment in the whole of this financial space. They've decided that the risk is not with the profits. They know that they made the money that they were lending it, that they decided it's not worth it so they've just a lot of them have backed out.
Now having said that I still got really good banks that lend. I've got six at least on this list that are lending still into solvency funds are not all right. Let's include one big tier but it's just that there's less of them. It used to be that you could go and talk to anybody and as long as you're buying the property they lent against like say and people since lent against residential property so you could buy that in your own name and interest in the company or in super.
And now they're backing out of lending to super which it just takes belief because a super fund is just a trust. But anyway that's what they say some of them are just getting out. But they'll still make enough money. Let's not let's not cry about the banks losing money. But I think they're going to go broke.
Bernadette: No actually I had some a group that I'm working with at the moment. They're doing a joint venture. They got a loan approved for a property in the sort of cooling off period. The property they bought with less than 50 sqm and in the cooling off period they decided that they were going to whack an extra $5,000 penalty because it was under fire. I was actually saying to them that I think they need to go to the financial ombudsman. Because the other thing is, that they actually didn't tell them that until the 11th hour. They went ahead it's not good.
Mary: Yeah. Well I know at one stage because that could change the rules all the time. This isn't accurate. This is just bank deciding making decisions.
But I could change the rules at one stage about how much the banks hold between what was investment properties and what was I remember. And they just came out with a straw and said overnight that your bank books have to be balanced at this level. And there were some banks for instance that were over. They'd been over lending against investment. And overnight they had to not make any more lending even if they had contracts of about setting the next day.
So then the banks would go and not having to compensate clients because they couldn't legally settle money for them. But they weren't allowed to leave clients out of pocket. They have to compensate them. But there was nothing they could do because the government overnight just changeable. We've gone through a couple of years with this stuff which has been pretty awful and hard to navigate.
But this latest study it does make you question are they starting to pull out because they know something that we don't? Like obviously they can't tell what the outcome of the election is going to be and we're all hoping that. Excuse me I'm not in public political here but because I vote all over the way. But nobody at the moment wants to vote labor because of the fact that potentially a kosher market. So it's gonna be interesting to see how this happens.
But do the banks know that regardless of who it is that both parties are moving towards some middle ground of stopping borrowing and super funds or something?
Bernadette: It's funny because I used to work with a financial planner from the Hunter Valley. He was always really great and really pro property and then all of a sudden he said look, I am not recommending any of my clients invest in property in a self managed super fund anymore because I'm just too concerned about what the government's flying at. And he’s concerned that they are going to retrospectively legislate.
Mary: Well they should take what's already in place. They usually do. So I'm not worried about that. But I did start advising clients about nearly 12 months ago not to buy at the moment.
I'm not talking about renovators that could see a deal and could work it out or split with it. But just people who were just going to do a buy and hold normal investment property. About 12 months old last June-July. Just wait another 12 months or so until this settles and then you can work out what to do.
Because properties are long term investment if we get it like you know me etc... we can see that we've got extra volume to release from it. But people that just buy these and as is and put long term tenants that was riskier beyond last June. So I should say just hold off of it. But I'm telling them now on time 1st time homeowners in particular I'm ready to get back in the gun and start doing a deal because it's going to be happening.
Bernadette: Oh! Great time for 1st homeowners. Well it’s really a great time for everyone.
Mary: Yeah it is. For buying. And those of us that are going to property and then selling it as long as we're buying again at the same time. Still okay.. With my home it's still all right. You with Rennie St bit different. Hold on to it. Well I just don't see that. I just. I'd be very surprised if I expect to see labor do a backflip if they want to get it because I think people will vote for them when they think the house will go down.
Bernadette: Yeah I agree with that. That was really really awesome. Thank you so much. Very methodical in how you've gone through it. So thank you Mary. Really great having you.
Mary: Thanks. Thank you so much. Take care.
Bernadette: Bye Mary.