Property Investment

A closer look at borrowing within your SMSF

Last month we looked at how to borrow and invest in property through your SMSF.Is it possible? Is It worthwhile? What are the challenges…and the benefits? This month we’ll be digging a little deeper and working through some calculations to help you understand how it could work to help build your retirement nest egg.

If you’ve sought advice and ticked the boxes that point you in the direction of purchasing a property through your SMSF, we think you will find these figures of interest.

Let’s look at the property cash flow analysis based on the following assumptions:

  1. Purchase cost of residential property is $630,000.00 inclusive of stamp duty and legal fees.
  2. Rental return of $24000.00 pa plus cpi 4% increase.
  3. Employer super contributions of $16,000.00.
  4. Personal super contributions of $200.00 per week.
  5. The interest rate is at 7% with cashflow surplus reducing rent.

Property Purchase Assumptions

Property Cash Flow Analysis 1-3 year projection

Through utilising your SMSF you could build a solid nest egg and gain equity on your property purchase.

There are many benefits of owning a property in an SMSF. Your advisor can help you understand exactly what these are, they can include:

  • Cashflow within the SMSF is improved with the help of employer and personal contributions.
  • The cashflow is then used to reduce the property loan.
  • The contributions will be taxed at 15 %.
  • Any potential capital gain is taxed at 10 % or tax free (if held through to retirement).
  • The return on the equity will grow at a compounding rate through the benefit of leveraging, with the bonus of being cashflow positive.

You may be wondering how these benefits compare to holding a rental property outside a SMSF. Some points to consider when holding a rental property outside a SMSF include:

  • The cashflow is negative, which requires further funds to pay for the property.
  • Extra cashflow must be found to reduce the loan.
  • To fund the cashflow outlay, you will have to fund the outlay from after tax money at your personal tax rate at 33.5 c or 38.5c compared to 15 %.

Of course, there are also disadvantages to owning a property in a SMSF that include being unable to use any equity gained to borrow further properties.

If you are looking to use your retirement savings to invest in property, we can’t stress enough the value of good advice and how critical it is to ensure your investment is set up correctly through your SMSF. If you would like more information or if you have any questions, please don’t hesitate to reach out to a member of the Sciacca’s team.

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