Investors may be interested in borrowing in a self managed super fund (SMSF) to invest within a residential property. However, investors need to be wary as this is not always the most financially effective way to buy property.
Self managed super has grown from a specialised strategy into a massive market comprising about one-third of the nation’s superannuation savings.
This can be attributed to a number of factors, including to marketing hype and expectations of continuing low interest rates fuelling demand for property. As the popularity of buying property through SMSFs grows, so too does the need for awareness and understanding.
It is essential that investors fully understand the benefits and consequences of borrowing to own a property in a SMSF compared to owning it in their own right.
Generally speaking, investors who pay the top marginal tax rate could be better off with a personal loan after set-up costs, management fees, and capital gains tax are deducted from the gross gains.
Buying a residential property through a SMSF carries additional responsibilities such as the fund’s trustees only being allowed to rent to tenants under “arms length” arrangements. Also, any rise in interest rates, falls in property value or overpriced properties would eat away at the profits.
Even negative gearing, which allows property investors to deduct interest costs against other income sources, may not be enough to offset the SMSFs higher legal and borrowing costs.
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