SMSF Property Strategy

Jason · 00:00Welcome to the Numbers Game. I'm Jason, director and co-founder of Future Advisory, joined by Nick, the absolute king of Innovate HQ. How are you mate?

Nick · 00:09Good mate. That's um it's good intro.

Jason · 00:12Just change it. The new one. Keep people guessing. It's good.

Nick · 00:14Then we're at the Innovate Headquarters again.

Jason · 00:16Innovate HQ, the place to be on a Friday AVO.

Nick · 00:19Where dreams come true. That's it. If you follow the plan. Only if you follow the plan. That's right

Jason · 00:24Both of our worlds will collide in this episode. Um, you know, I'm gonna set the scene for people at home. They've probably been in a barbecue um and they've, you know, somebody said, you know what you need? A self-managed super fund. Or at the gym. Or at the gym, yes. Producer Tommy uh was he was getting upsold into a self managed superfund at the gym. It it's a it's becoming more common. Um I think in in just general conversation, 'cause the everyday LZ wants to take control of their investments. Um, you know, and I and again this is a narrative and it's not the same for everyone, but I think, you know, you hear a lot in the media about our government necessarily doesn't spend the money from taxes well and you know we're overtaxed. And if there is an area of of our system That is for now still quite tax efficient. It is the Superfund realm, which is fifteen percent. But when it comes to taking control of it, the old self-managed superfund, of course, just as the name suggests um is an area where you do have more control over how your super is invested, what you can do with it. And I think uh it's a good place to to rip in at the moment, Nick, is to, you know, whether a self-managed super fund is a smart retirement strategy or potentially an expensive mistake.

Nick · 01:37Yeah, and you know we we've touched on uh SMSFs in the past and um whether it was in regards to lending or property or just SMSFs in general, but Something that I've noticed since coming back um in 2026 post-Christmas is there's definitely a spike in inquiry. Now, whether that's because of things you were just talking about, people wanting more control um access to information through things like social media now and buyers agents out there um hypothetically pushing certain strategies. Or it's just barbecue chat or, you know, the guy at the gym who rocks up in his G Wagon, Jack with the bumbag on, and you never work. You must have an SMSF. I think that's what Tommy was referring to. Um so I just thought it'd be real timely to discuss particularly property investment inside of a self-managed superfund Um, you know, you want control, but what does all that look like? So what are the things you need to be aware of? If you are buying property, can you lend? What does that look like? What are you paying? Um what are you doing with the fund? Is it is it actually doing what it needs to do for you? So perfect time um to start that conversation, I think, because it is on the up again. We it it it was quite um quite popular um I'm guessing here but from memory it was around 2008-2009 it was a very popular strategy and then it disappeared for a while, as in Property Insider Super I'm referring to. Major banks pulled away from the lending. Still some niche and some small lenders that played in that field, but we are seeing a resurgence in inquiry. Um, and you've mentioned the same. You're definitely saying that uh from um an accounting point of view. So yeah, let's get into it and um Just covers some facts and figures.

Jason · 03:22And the numbers are the significantly increasing year on year, the new formations of self-managed super funds based on the ATO's data. Just every year there is a significant increase in newly formed self-managed super funds. So Um, you know, it's not just just not just the what we're hearing at the barbecue or the gym. It it is real data that suggests that self-managed super funds are becoming a real part of people's strategy.

Nick · 03:43Yeah, and look the reality is it's right for people to care about it because it is your money and majority of Australians, super is their biggest that's asset outside of their family home. We see that in our business. So it is right to care about it and it is right to want to uh make sure that it's doing what it should be doing and it's doing the best it can for you. Um but It forms such a pivotal part for most people's retirement strategy. Or if we move away from that word, as we spoke about last episode, financial freedom. Yep. that it's an im it's imperative that it is doing what it should be doing for you. So, you know, if you feel that you need to buy a property because your super fund is not doing what it needs to be doing. You just need to understand that that is going to be um or be sure that is going to be the solution. And what does it actually mean outside of Property goes up, my super's there, I don't trust investment markets, so I'm gonna buy property. There's far more to it than that. But let's not forget the underlying reason people are doing this is because they do care and they w do want to go ahead. So I think that is great. Um but there's a lot of complexities around compliance. Um flexibility is another thing or lack of flexibility. Um, you know, you you're buying an illiquid asset, which can cause some issues. Um and ultimately sometimes there are better performing strategies out there depending on the asset that you buy.

Jason · 05:14So and and the the beauty of uh having these conversations and discussing this is we see a lot of people that get into it and they don't get into it with bad intentions. But what happens is they have bad assumptions. They assume they can do certain things in a superfund which aren't true because of the complexities of the rules. And uh we'll dive into unpacking that, but you know, prime example might be being able to renovate a property to increase the value. You know, something as simple as that. And in theory, it's it seems like something that you should obviously be able to do. Like if it's all about growing wealth in a superfund and you buy a property that needs a renovation to make it go up a hundred grand in value, beauty. And a lot of people go and go down this path and then realize that, you know, it's something you can't do. Your fund is no longer um able to to continue because you've broken the rules and the flow on effect is is pretty detrimental, but we'll go into a few examples.

Nick · 06:05Yeah and it makes sense that you should be able to do that, right? Yeah.

Jason · 06:07Makes common sense.

Nick · 06:08Of course. So I think maybe we start with what is available or what what what you can do, particularly from a from from a lending point of view. You can buy a residential property in your self-managed super fund. Your self-managed super fund being the borrower, if it's a residential property, you can lend up to 80% of that. of that purchase price. So just pick an easy number, million dollar purchase price. The bank will give you $800,000 to buy that property. You will then need in your super fund the gap between what's needed to settle and then some liquidity and then generally the loan amount. So a million dollar property. 5% stamp duty would be 50 grand. Yep. You borrow 800, so you need 250 as a start in your super fund. You then will need solicitors costs and a few other things. Most banks or lenders want you to retain 10% liquidity, so 10% of the loan amount. So the loan amount's 800 grand. Uh you'll need $80,000 in there as a buffer. Yeah, in case the tenant's not paying, you lose your job, super contributions aren't coming out. So I say safely work on 30%. If you work on 30% of the purchase price, you're gonna have enough to do it. Um if you're doing that, you're looking at an interest rate of around uh 7% if you borrow 80% of the value. And then the interest rates come down as your L VR or loan to value ratio comes down. So, you know, entry level about 65% L VR, you're looking at sort of low sixes as an interest rate. So you can do that for residential or commercial. Commercial property, very popular. We spoke about this. The business owner wants to rent their own premises from their super fund. The other strategy that we're seeing more and more of, which is far more complicated, but is uh numerous parties getting together and investing in a particular um vehicle that owns an asset. So Jen, we're only really seeing it with commercial, but you buy an industrial commercial property, for example, and you know that property's worth a million dollars. Um the entity owner there's a there's a standalone entity that owns that property, five in five investors come in at 200k each, and one of those investors might be your self-managed superfirm. funds. So we're seeing quite a bit of that. If there's lending required for that, um becomes tricky. There's only a couple of lenders that that that we know that we can use that will actually fund that. So But we are seeing more and more of that. And what you might see then is someone's using their super to invest in an asset that hasn't actually been purchased in their super fund. They just own a percentage or a um shareholding in that. in that particular asset. So the lending there, again, less lenders, more more expensive supply demand. So you're looking at around an 8% interest rate for that. uh and far more complexities which you might talk about later in regards to tax or um compliance. The other option you've got is, and we do see this, is to use equity outside of um the actual property. So Hypothetically, you could have a house worth a million dollars with no debt on it. You could lend $800,000 against that property in your own name, and then you lend that money to your superfund. Yeah. Um why would you do that? Yeah you'll get a cheaper interest rate. Um you know it's it's still gotta follow the same lending rules. So you've got to have loan agreements, there's an interest rate that's gotta be paid, it's all gonna be super tight, but that's another strategy that that we've seen. Or if there's a um, you know, there's there's there's shortfalls inside of the super, which we would not recommend you do, but we've seen it happen where people will get that money or leverage against assets outside of the fund. So

Jason · 09:44Which yeah, I mean, and and as as as complex as it sounds and there is complexities to it, there is also if you structure it right and have the right plan, there is also some flexibility. Um You know, the the self-managed super fund when you do lending, um, you know, people will find out as they dive into this, you need a bare trust, and that bear trust is what's used for the lending. But we've had uh we've actually got a mutual client who needed to front up some extra cash to make a commercial property purchase happen and was able to loan that from his own company or from himself personally to the bear trust. all commercial arm's length, you know, um agreements and everything in place, but the ability to get that deal done and purchase that commercial property, which is where the business was being run out of was an absolute game changer for for that particular business owner. And now as part of a great wealth creation strategy heading towards financial freedom. running that business, paying those rent payments to their own superfund instead of somebody else who owns the property. So very clever.

Nick · 10:42Oh, and look, mate, no doubt there's there's there's no doubt about it that if it's done correctly, it is a good strategy. And I'll give you a really um basic example which is which is what a lot of people are doing you buy a a high yielding asset so that's generally a commercial asset so It's probably not going to grow as much from a crap capital growth point of view, but it's going to provide you good income. So you've got a high yielding asset at say 7%, anywhere from 5 to 7%, depending on where it is and what you pay for it. So you you're paying a an an interest rate at say 7%. So you've got the uh the the the rent nearly covering the interest rate. If it's commercial property, you don't pay outgoings. So you've got your tenants paying all the outgoings, things like insurance, strata fees, all these other things. Your tenant is responsible for the upkeep of the building. So if something seriously breaks you've got to fix it, but general upkeep generally the the tenants will um take care of. So you go into that property, you know, you've you're 40 years old, um, you've got 25 years left to your to your retirement. You buy that property inside your super fund, you take a 25-year loan term. Um the uh the super contributions you're putting in, so let's say you're on 150 grand a year. You got somewhere around 15 to 18 grand a year going in in super contributions. That along with the rent covers the repayment and any expenses. You've got a 25 year loan term. You get to retirement. You've got an asset that you bought for a million, which is worth, uh, I'm just picking numbers here, two million. But it's yielding somewhere between five and seven percent for you. So if the asset's worth two million at five percent, it's now yielding for you 100 grand a year. So that's the ultimate strategy and that's where I think the strategy works. Yeah.

Jason · 12:30And then when you hit pension phase, CGT of uh crisp Zero percent.

Nick · 12:34So sure. But there's a strategy there, right? So I'm 40. I've got a 25-year loan term because I know that when it comes to retirement, I'm not going to want to make be making a repayment on it. because my super contributions aren't going in. So my um the rent is not going to cover a principal interest repayment. So I need to line up that debt reduction in line. um with my retirement if I want to keep that big that asset. I could obviously sell it, liquidate, pay what's left in the loan and put the money in there and do something else with it. But that's a strategy that I really like. But unfortunately what we've seen is people going into transactions without that kind of knowledge or or detailed strategy. They just think they need to buy any property. Um buying property is good. Every property I buy is going to go up. I haven't really thought about what's going to happen in 25 years. um when I need to to to liquidate my fund, start pulling money out as an income because I don't have a you know any ongoing income from my job anymore. So, you know, that's something that we're seeing more and more of just through what's available online from an information point of view. People are getting snippets of what they can do, but not the whole lot. So I've just listed here some key considerations that people need to think about. And obviously the thing I will say is you should never do this without advice. And that advice should never come from a property person. That advice should also always come from a reputable accountant or a financial planner. Of course, you might have a really good property expert who can help you with the property. Um, but they won't help you with the strategy side in regards to retirement, even if they promote that they do. Um so key considerations, setup costs. So accounting and legal costs. So I come to you, Jace, to set up a super fund, a self-managed super fund, what am I looking at pay?

Jason · 14:24Yeah, definitely close to three grand for just the super fund with a corporate trustee. And then by the time you throw in a bear trust and another corporate trustee for the bear trust, you're probably approaching four and a half to five, depending on some of the complexities. But yeah. Up front, um, paid for by the super fund by the time you get your rollovers and everything sorted. Um, but yeah, you want to have if you're lending to buy a property, expect to pay about five grand.

Nick · 14:47Yep. Second to that, most accountants won't like or won't accept people setting them up without a financial planner involved Um it's very rare that you'll find an accountant that will set them up without a planner. If you come to us uh and we're at we're at the cheaper end. um to do a financial plan or a self-managed super fund, you're looking at about $5,000. Yep. Because of all the hoops that we've got to jump through.

Jason · 15:10Which so many people want to avoid that. And and it's and it's frustrating because what you've just talked about, that twenty-five year plan of the forty-year-old buying the property and how to get it right by sixty-five, so it's part of the strategy. The ones that if you avoid that, oh, I don't want to pay five grand up front, oh, I'm gonna buy this property. But often getting the wrong property as your first one really impacts all of the other financial decisions in your self-managed super fund and outside as you flow on. So you know the the investment in that five grand up front It it pays for itself over and over and we see the mistakes of the ones that didn't do it and they've they've find someone and and it's As much as it shouldn't be, and I think there's some scope out in, you know, CPA, ATO, tax practitioner board, ASIC, you know, whoever's regulating all these areas to go. Self-managed super funds can still be set up. Like, you know, with directive saying, you know, I want this and this, it can be done. It shouldn't be though. I I still think you know there's there's a there's a room there's room to improve around buyers advocacy of people getting properties and being sprooked and pushed into super funds without a financial plan. Um so yeah, I think

Nick · 16:18The financial plan covers thing. The main thing, well there's there's two main things it covers, the pros and cons, firstly. So is this the right thing for you to do? And if it's not, what are the alternatives? So even if you still do decide to do a self-managed super fund, at least you've got that knowledge and you've made the decision. The the most important thing it does is a planner will ask you what you are trying to achieve here. So we go back to that word retirement and we replace it with financial freedom. Well, I want to have the ability not to work by age 60. All right. Well, let's actually project out what this property is going to do to the best of our ability. and see if it's actually going to get you there. Yeah. And if it's not, okay, well then what do we need to do? It could still involve an SMSF and it could still involve a property. Otherwise you're going in completely blind.

Jason · 17:05The other one that freaks me out is insurances. If you go and roll everything out of a fund where you did have some TR. Total permanent disability, um your income protection, uh your trauma, your life insurance. All of these are often you get some default policies in your existing industry fund. We we've seen it where they all get closed off. But then they've got some kind of pre-existing condition that would have been covered under an old policy, but then they can't get a new policy. And it's like you can't undo that. Once it's done, it's done. So yeah, like and again That all of a sudden the $5,000 for an upfront plan isn't sounding too bad when you look at the the risks that you do of getting it wrong.

Nick · 17:42And this next one's big, the whole liquidity issue. And What people don't think about if that is this property is for retirement. So if I get to age 65 and I want to retire, okay, I'll pay the debt off. But I've now got a property that's worth a million dollars. Now, if you look at Melbourne rental yields, they're about 4%.

Jason · 18:06Yep.

Nick · 18:07On a good day So I've got a million dollar property that I can't I can't liquidate. All I can take from that property is 40 grand a year, 4%. So I've got a million dollar asset that's giving me 40 grand a year gross. Then take out agents' fees because it's got agent and agent managing it. Take out um accounting fees. Take out insurance, landlord's insurance, all these things. You're probably going to be left with not much of the rent. So you've got a million-dollar asset there providing next to no income and you need an income to live. What would traditionally happen if you're an investment vehicle that was liquid? You would park it somewhere. Um, conservatively, it would return you five to six percent a year in an investment vehicle. um you know with the with the balance of you know probably shares um some some property assets um through um through a rate uh and maybe you know fixed um fixed returns like bonds and stuff like that. And then people will gradually draw down on the capital because you retire, you've got a million dollars in the super fund. You don't want to go into the grave with a million dollars there. Most people will get the take the return and then take a little bit of a capital and then we map that out and show that that's going to last for 30 years. Now, when you've got a property, you can't take a little bit of the capital because you can't tip a brick off and cash it in. So you're left with this uh conundrum where if most of your assets are inside of property or are property, you have to sell them because you generally can't survive on the rent. And that's just a fact, particularly in in in this country. That's a key consideration. Yields, contributions versus rental income. You know, are your contributions going in there actually going to service the debt post the rental income coming in? Um, you can't refinance them. So this is the common thing that people go, holy shit, I didn't know that. I want to build a property portfolio. uh the property's gone up by 300,000. I want to leverage that equity and I want to buy another one inside the superfund. You can't do it. It's set and forget. So if that property doubles in value in two years time, you cannot access that equity outside of selling the property. Um that stops a lot of people actually doing SMSF. No development allowed, so you can't improve. You mentioned this, you know. You can't buy a block of land and build on it. You can restore things back to their original condition or repair them.

Jason · 20:28Yeah.

Nick · 20:28But you can't go in there and start knocking walls down and put an extra bedroom on and create value that way.

Jason · 20:34Definitely one of the big ones people get wrong. Or they they buy with the intention of, you know, we've got a big block so we can develop on the back or you know, we're gonna knock down and rebuild. It's like nope, you cannot touch it. You cannot go in there, you cannot stay there. We've seen people um get uh holiday units in places like Port Douglas, for example. And it's like, oh, it wasn't tenanted. It's all good. I'll just swing. No, no, no. You know, you can't touch it. You can't go there. Do not do not stay in that room.

Nick · 20:58Yeah. And look, most people um When you talk to them about that, they blow up. That's ridiculous. Why wouldn't I be able to make the asset better? It's my money. People need to remember super was put um in place So that you couldn't touch it. And it would do its thing, which it does its thing. If you if you leave it in an investment vehicle, that's right. And you can get it when you're retired and you haven't had the ability to stuff that up. Now, I'm not saying people will stuff it up. But if you start pretending you're a property developer or you're someone who can renovate a property and things go wrong, then that's against the whole that defies the whole reason that they put Super in place. So you're now starting to play with that money and try and do better things than what it could do. Um, but what if you make a mistake? What if a builder goes broke? All of a sudden you've wiped your retirement savings. So the government is trying to protect what they put in place, which was almost a foolproof system. If you start giving people access to that money and they start gambling with it, hypothetically, um, then you can have in some circumstances people that make the wrong decision and don't have a retirement.

Jason · 22:08Which is why these guardrails are so important.

Nick · 22:10That's why the guardrails are there. And look, I admit, sometimes I think and you know, for the right people you say, well, it is ridiculous that you've got to go through all that. But They're trying to accommodate for the majority. And the majority of people are not renovators, are not property developers, and should should not be. So it is there to protect people as much as they might think not. And the last consideration which is is compliance and the single acquirable asset rule. And you know, we've had a circumstance ourselves. Um we have a client get into trouble, but you if you buy a property, and we see this happen a lot because people buy um hypothetically it's a commercial property. And there might be two or three titles because there's two or three different dwellings on there or offices or yeah, whatnot. To do um an LRBA, so limited uh recourse borrowing arrangement. You can only have one single acquirable asset. So you can't buy a property with two titles and do one loan. Because that property is not sellable by itself. That's basically the rules around it. So you might find a lender that will do it for you, but the property needs both properties need to be able to sold, be able to sold separately Which means you need two sets of bear trust, two sets of compliance docs basically, two sets of fees. Um the the example we had was um Someone had bought a property which was two titles. There was a business renting that property and it knocked a wall down in the middle. So you basically had two assets that had been turned into one. Now, the bank looks at that and says, we can't sell that asset separately. You've knocked a wall down. There's one lease across the property. It's a it's not a s it's now a single acquirable asset but with two titles. Yeah. We can't take one title and rip it away because someone's got a lease on Both titles. So things like that. It's and we had i difficulties getting that funded. So these are things that people don't know and don't think about, which is why you come back to Get help, get advice, understand the pros and cons.

Jason · 24:17100%. And yeah, that w we got the deal, got it done, got it all sorted, but wasn't without uh, you know, some uh some interesting moments.

Nick · 24:26Outside of that, the only other things to think about are costs. And you know, you've mentioned your setup costs at a we'd say like four or five grand. Yep. And Our setup costs are similar and people might think shit that's a lot of money. But that that just demonstr demonstrates the work that we've got to do because of the compliance to actually get these things in place and the checks and balances that we have to do. There's another 30% more effort for us as far as getting an SMSF setup ticked off from our compliance people to just a normal super fund.

Jason · 24:58Yeah. And a lot of those setup costs go towards legal fees and structure and ASIC. You've got multiple companies, directors, loan uh shareholder certificates, all the rest. So like, yeah, I mean There's work that goes in up front and then there's also the annual stuff. I mean, you you forget when you've got a industry fund or, you know, and your super's doing what it's doing and you get your shiny report at the end of the year. When you've got a self-managed super fund Your accountant has to run the profit and loss, do a balance sheet, you know, measure your investments, make sure your dividends have done what they've done, you've paid your 15% tax on your um your earnings um and if you're in pension and everything else like it's getting even more complicated. And then once your accountant's done, you've actually then got to also pay an auditor who has to go through everything as well to sign off on the audit. So Again, you pay management fees in your industry fund. It's comparable to what you might pay for your financials, tax returns, and audit in a self-managed superfund. But it's again the things that you need to be aware of up front is that's an annual cost that you've got to factor in. For sure.

Nick · 25:59Yep. Um, and people don't think about it. They don't think about that. And those fees I see with our clients, those fees from accountants, because of the hurdles that you've now got to jump through. are going up and up and up and up and up. So you've got to factor all this in when you're thinking about what that property needs to return. Because there's more cost associated. And I say to people over and over again, if you're not going to buy property inside of your super, if that's not your plan, you do not set one up. Because you can get a far better result just investing in w a an industry fund or a retail fund or a wholesale fund that we can help with um versus, you know, trying to do shares or whatnot yourself. You're gonna attract all those costs which just don't need to be paid. Um so that's really it, mate. I like I just wanted to get across like the main point I wanted I wanted to make was You're doing this to fund financial freedom. So make sure what you're doing is going to get you there. And we're not at all saying property won't. In a lot of cases it will. But understand what that property needs to look like. Project that out. Make sure it's going to get you to where it needs to. Understand what else is available. And is property actually going to be a better result for you? Because the share market is highly predictable, as most people might think it's not. When you understand the share market, highly predictable when you go back historically, not over the short term, but over the long term. So we can we can get really granular on what you need to do to get to that. financial freedom or that position of financial freedom. And just understand these pros and cons and um you know don't get caught out. And the reality is a lot of people do get caught out. They either buy the wrong asset or they don't think about all these other things. Um that really impact what they're trying to achieve, which is I don't want to work by the age fifty five, sixty, sixty-five, whatever it is.

Jason · 28:02feel good. You don't want the overwhelm with the stress of of getting it wrong. So it's understanding all this up front, which is why we're here today to have uh unpacked this. So You know, if you are sitting there going, geez, uh, you know, I'm left at the end of this wondering, is a self-managed super fund right for me? It's right that you've got questions. Uh it's right that you haven't got to the end of this episode and gone, yes, I need a self-managed super fund. Um, but you may be sitting there going, this is something I want to consider. So reaching out to innovate, get in touch with Nick and the team. You can have that conversation around what is the right strategy for you. But it might not just be the SMSF conversation. It's going to be a more broader. plan to make sure that it is the right thing for you and your financial freedom one day in the future. If you do have a self-managed super fund and you think, you know what, I don't really know if the accounting's being looked after.

Nick · 28:47Come and say good day. We're friendly. We won't bite. We would love to chat to you about your self-managed super fund. We absolutely love them. That's a big growth area for us.