Let’s face it, debt can be a dirty word. But if used correctly, borrowing against your SMSF to purchase an investment can be a great way of increasing wealth and ensuring you’ll have the retirement you want.
Buy a good investment
Finding the right property is imperative to grow your wealth and take advantage of the generous tax incentives available. With over two decades of uninterrupted growth in Australia, you’d be forgiven for thinking that any property purchase is a winner. But don’t fall into this trap!
For example, rather than purchasing an apartment in a CBD tower block that has 200 identical apartments, a better purchase might be an apartment in an older-style block in a leafy inner-city suburb. These apartments are generally larger, built with quality materials and tend to hold their value. They are rarer and more expensive, but will probably prove a better investment in the long run.
Give yourself flexibility and pay less tax
Buying a property you want to live in can also increase your options once you retire. You or your family can’t live in the property while it is owned by the fund. But once you retire and receive a pension from the fund, the fund can transfer ownership to yourself at the property's market value, without paying any capital gains tax. Win-win.
Harder to obtain loans mean more protection
Smart debt is the key to creating long-term wealth. Buying the right property through your SMSF at today’s prices will not only grow your assets once the loan is repaid, it will also provide you with capital gains and an income stream. Both of these taxes are 0% once you’ve retired and are drawing a pension from the fund.
An SMSF can only obtain a limited recourse loan. This means that if the SMSF defaults on the loan, the fund’s other assets are protected from creditors. As such, lenders require the SMSF to provide at least a 20–30% deposit and loans are harder to obtain. But this actually protects you and means you’ll pay off your loan quicker. While interest rates are so low, you could be able to pay off the property sooner than a regular loan.
Using your SMSF to purchase a property also means that your lender can only look at your SMSF’s assets, not your personal assets. So if you have a home loan on the house you live in now, your lender can’t take that into consideration. While it’s important you have other assets in your SMSF portfolio, this can be a great method of increasing wealth with smart property investments.
If you want to learn more about SMSFs, download an today.