Ins and outs of SMSF IP

Discussion in 'Investment Strategy' started by Darlinghurst Boy, 10th Mar, 2016.

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  1. 158

    158 Well-Known Member

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    Certainly a healthy debate.

    Viable option to keep industry super fund open, however, I have little faith in these.

    Also. NRAS hasn't been an option in the past, nor will it be an option in the future with NRAS winding down. So it's really only an option for punters ready to go today.

    Commercial has proven to be effective in the past, present and I dare say future.

    People who read this thread in 10 years may not have an NRAS option to take up (or perhaps they will in another form...who knows?)


    The most important thing about this whole debate is to at least plan and do something, even if NRAS works for you now, or perhaps save a few more years for a decent CIP/equity portfolio.

    My personal view remains the same though. Low entry SMSF purchases income will be severely eaten up in fees, costs and insurances. Also the resi vs. commercial where all outgoings are paid by the tenant adds significant precious income to be added to pay down the asset. You can't beat that in resi combinations and even worse if it's a non NRAS resi.

    pinkboy
     
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  2. 158

    158 Well-Known Member

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    Definitely not a silly question.

    Yes, if you have a loan on the property then yes, if it's empty you still have to keep payments up. SMSF is just another entity, just more responsibility.

    Paying outright for a property isn't a bad option if that's what helps you sleep at night. A $300 - 400k deposit would have been able to buy a decent CIP, but if it kept you awake at night knowing it could be empty, then that's not right for you. You to have to think the possibilities of a large purchase could do for you though in terms of wealth over 10-15 years paying off a CIP though using other people's money. In 15 years your resi property might be just earning you $30k p/a (as opposed to $100k+ p/a on my scenario above). Same as outside Super, plan 5/10/15 years ahead to retirement phase.

    Also, I'd reconsider small caps for equities and go for good solid income earners such as LICs and ETFs. Small caps don't usually have dividend payouts so you're relying on growth.

    Art? Hmmm....again, no income, so relying on hope.


    pinkboy
     
  3. Beanie Girl

    Beanie Girl Well-Known Member

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    Great post, pinkboy! :)
    Yeah, the SANF factor is a big thing for me.
    It's tempting the whole CIP thing but I am a bloody worry wart and somewhat risk averse
    plus I don't understand commercial properties and what makes one CIP a better investment than others, I would be clueless
    So I think from my simple perspective, that if one was to go for a CIP, one must understand the different CIP markets and the possible peaks and troughs of these markets and to ensure that one does not invest in a lemon of a CIP!
    If one understands CIP well and one has cash reserves (e.g. from successful business or big salary) to buffer against unexpected or unforseen circumstances, then CIP would leverage wealth faster, I would agree.
     
  4. kierank

    kierank Well-Known Member

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    I don't know how you came to that conclusion as I didn't say that at all.

    What I said was "Don't want to pay the REA commission, the legal fees, the CGT, ... "

    Paying these lowers one's net worth. Why would one want to lowers one net worth if one doesn't have to. I would rather pass this problem onto my grandkids :) :).

    Our strategy is Buy and Hold. When we were working (i.e. had our own business), we bought properties which we believed we would achieve good capital growth. Because of this, all of our properties were negatively geared and we look advantage of this tactic. But over time, they are all becoming positively geared (e.g. when we bought our first IP, it was rented for $165pw; now it is $445pw).

    As our properties were becoming positively geared, the Government increased the tax free threshold from $6k to $18k each. So, we can now earn $36k in net rental income before we get on the tax radar.

    Some would say we were lucky. I would say you make your own good luck.
     
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  5. ellejay

    ellejay Well-Known Member

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    I get what you mean, selling means RE fees, cgt, land tax reduces your net worth. Why is the higher net worth figure important though, do you use it to continue borrowing? I'm just curious and you don't need to answer. I count my net worth as what I think is a realistic market value for the properties I own and the selling costs are what they are. I wouldn't want to feel after holding a negatively geared property for 10yrs or so that I couldn't face selling it because of the costs.

    It's interesting to me though that these costs are so significant that they put people off selling and enjoying the equity. Luckily you dont need to sell :) I just think its an important point for people working out their strategy to consider because I've heard a few people who've seemingly done well from growth go on to say that it's really not that flash by the time you've sold up and paid fees.
     
  6. Scott No Mates

    Scott No Mates Well-Known Member

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    If you've got a market rent review in your lease to your smsf, you can use this to bump your rent (eg for a mrr in final year or annual mrr) to make a hefty contribution to your fund via rent esp if you're close to maxing your contributions cap to super.
     
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  7. 158

    158 Well-Known Member

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    Building on from a scenario @Westminster and I have been chatting about, you have just given me another idea Mr. @Scott No Mates ! Thanks.

    pinkboy
     
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  8. Redwood

    Redwood Well-Known Member

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    Hi there DHB -

    Couple of points:
    - admin costs are not what they used to be - many 'online providers offer free set up and even free admin for a couple of years (due to the commissions they earn) which is great for the punter. Specialist SMSF providers will provide the turnkey SMSF for around a $1000.... this will continue to decrease and become more competitive over time.

    Re the industry not talking about SMSF? nah, its at powerful as ever, with shares copping it more and more people are fearing another GFC and running to a SMSF for safety. $600 billion industry is SMSFs.

    My experience? well as you know my business is SMSF however, I down own commercial property in my SMSF which is a must for all small business. We lease to our business and pay rent to the fund....also, reduce profit by using concessional contribution caps for each member of the fund, reducing tax of my company and bumping up my SMSF cash balance....strategy is a property every year.....

    There is no minimum for SMS - its all about strategy - i.e a small business with $60k in super can quickly with four members contribute 4 X $30k and buy a commercial property to run their business. Unfortunately, industry funds run a scare campaign about this and punters are starting to be educated in this regard.

    For resi - you can borrow up to 80% for established property and for off the plan there are still off the plan lenders but I see this around 70% for off the plan in the next 2 years due to tough servicing and whatever APRA does. Many of the lenders have exceeded their limit for investment loans which is hurting the SMSF loans.

    For commercial you can borrow up to 75% but work with 70%. Rates are negotiable for commercial but not residential. Relationships are important for scenarios. I am liking CBA and St George/ BOM in this regard.

    You can still buy a 1br apt with $100k in super....but be sure you understand a 'cash buffer', a non bank lender is becoming extremely popular due to their favourable servicing and 80% off the plan.

    The industry is changing and will continue to change from 1 July 2016 - where many accountants will stop advising on SMSFs. Fees will change so worth getting it done before then.

    Cheers Ivan
     
  9. kierank

    kierank Well-Known Member

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    I am happy to answer as I feel this is important.

    In retirement, I believe Net Worth is everything. If you don't believe me, just imagine what your lifestyle would be like if your NW was zero or even worse, negative.

    To me, it is so important that I calculate it at the end of each Quarter. I have been doing this since January 2003 (yep, for over 14 years). I plot my NW in a graph in Excel so I can monitor trends.

    I have been in retirement for over 5 years and I am self funded. If my NW goes up (especially at a rate higher than inflation), then it means that my lifestyle is sustainable. That is, I won't run out of money. That is important to me :) :). I am currently in this situation; last year my NW increased by 5%, after funding my lifestyle.

    If my NW was to decrease, I wouldn't panic initially. I would look at my NW graph and its trajectory to see when the money might run out. If this date was way past my expected lifespan (e.g. say 90 years time), I wouldn't panic. If the money was forecast to run out when I would reasonably expect to be alive, I would take corrective action.

    By monitoring it every Quarter, I get an early warning. I trust this makes sense.

    Selling my IPs is the last thing I would consider doing.

    As I have stated before, my SMSF is funding my retirement. My pension is basically tax free (will be tax free when I turn 60 in June) and the 4% pension is more than enough to fund my lifestyle.

    If my SMSF was to run dry (very, very, very, ... unlikely), we would sell our PPOR (acreage and debt free), downsize to a smaller property and live off the remaining balance.

    When this money runs out, we would live off the money in our multiple Offset accounts. This money is our own hard earned cash. Taking this money out could cause our current cash flow positive property portfolio to become negative over time BUT, at least, we are using the ATO to help fund our retirement.

    If all of our offset accounts run dry, then, and only then, would we look at selling our IPs and converting our equity into cash. We would use this cash to fund our lifestyle.

    Once this cash runs out, we would go on the old age pension.
     
  10. ellejay

    ellejay Well-Known Member

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    Thanks so much, it's great to see actual accounts of how people are walking the talk, rather than just talking. I have 12 ips, all but 1 are cf+. We don't have kids and this is probably a crucial difference. I've thought alot about smsf but as we have so much equity and investment in property I'm probably happy to leave my super in work fund. My plan is to sell one every year or two from when I hit 50 (if I make it). The cash plus rent from the others plus the remaining being paid down over time should be enough to fund us in retirement. Plus super if we can ever get access to it. Plus anything else I can make between now and then.

    If that's not enough it's just tough.
     
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  11. kierank

    kierank Well-Known Member

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    That's the important thing.

    Have a plan and, if the plan isn't working, then, for God sake, change the plan!!!
     
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  12. kierank

    kierank Well-Known Member

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    upload_2016-3-13_22-8-40.png

    @ellejay, I thought I would add the graph I referred to in an earlier post. I retired in September 2010.
     

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  13. JohnPropChat

    JohnPropChat Well-Known Member

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    Didn't know it can be done this way. Thanks. So you just top up your insurance-super-account every now and then to keep up with premiums?

    EDIT: May I ask, which fund you use for insurance?
     
    Last edited: 14th Mar, 2016
  14. JohnPropChat

    JohnPropChat Well-Known Member

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    I thought one can keep their fund in accumulation and pension mode concurrently and selectively moving assets between them to get around the minimum pension payment?
     
  15. See Change

    See Change Well-Known Member

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    Don't know the answer to that re moving things around , but it sounds suss to me ...

    My understanding is that when you go into pension mode , further contributions go into another accumulation account , but that's definitely an area you'd need specific advice concerning your circumstances .

    Cliff
     
  16. JohnPropChat

    JohnPropChat Well-Known Member

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    I can't find the article I got that information from but here is a similar one about partially rolling back assets from pension to accumulation account.
     
  17. Scott No Mates

    Scott No Mates Well-Known Member

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    I would be concerned about relying on superannuation articles from as far back as 2010 - always seek current opinions from your advisor.
     
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  18. Jeah_

    Jeah_ Well-Known Member

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    We have 2 IPs in our SMSF. It is a bit of fun on the paperwork side going through the initial setup, the loan paperwork, etc etc, but I think worth it in the long run.

    A few things looking back from this side;

    Like everything, do your own research relevant to your own situation. Involve your team i.e. Your accountant, your broker, your solicitor, your mentor. Then research some more. Build your plan for where you want to end up. Lots of 'yous and yours' in there, but they are the most important bit

    As has been well covered, most lenders will only do 70% LVR, some will go to 80%. We couldn't find a lender at the time who would touch NRAS property.

    SMSF interest rates tend to be 75-100 points higher than normal rates and the application fee for the loan can be up to $2k

    Some lenders will require you to have a solicitor sign off that you have obtained, and understand*, legal advice on the mortgages.

    * there seems to be a significant cost increase in legal advice between just reading some documents for you and providing you with a summation and some advice and when your solicitor needs to provide a documents stating that you understand their legal advice. The quote we got was around $3.5k, requiring us to be there for 4-6 hours to go through it.

    Our lender also required us to have at least 10% of the total assets of the SMSF as liquid assets in case of emergency. With total assets of ~950k, that was a hell of a lot more than an emergency fund of $3k! We parked a chunk of that cash in an offset against one of the IPs (effectively its earning 5.3% p.a), the rest into shares (60% LIC and ETF, 20% ASX 200 and 20% I put into a CommSec account to do some day trading with when I get time)

    The idea for us is to pay down the smaller of the 2 IPs, sell if the market times well with us and then diversify to a commercial holding for a long term play, whilst paying down the second IP.
     
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