So, you’re thinking about investing in property with your self managed superfund (SMSF). Great, now you just need to decide which kind of property to buy, how to buy it and how to get the most from your investment. Not so simple. Investing in property with your SMSF can present a minefield of options.
One question to ask yourself early on in the process is whether you’d like to invest in a commercial or residential property. Using your SMSF to purchase a commercial property has some benefits over residential property. However, this increasingly-popular method of maximising wealth carries risk and needs careful consideration.
We’ve uncovered some of the pros and cons around buying a commercial property or a residential property to help you understand which investment option is right for you.
Rent the commercial property you invest in
The majority of commercial properties purchased through an SMSF are then leased back to a business operated by an SMSF member. SMSF funds can invest 100% of its money in commercial real estate if a member of the fund runs a business through that fund.
An SMSF can also borrow to purchase a commercial property. This is only available to SMSF funds – you can’t buy a residential property and occupy it or rent it out to a relative, so this option is great if you are looking to run a business.
Pay rent to yourself, not a landlord
Many investors prefer paying rent to their superfund, rather than someone else. This is especially true with commercial properties, as rental yields are generally larger than residential yields, so your investment grows quicker. However, capital gains on commercial property tend not to be as large as a smart residential investment.
Tax on rental income is only 15% and capital gains at 10% if the property is kept for more than a year.
Remember, there are always risks involved
Despite all the positives involved in investing in commercial properties through your SMSF, there are still some drawbacks. For starters, tax losses from the property cannot be offset against your personal income tax.
There are a few conditions to be aware if you’re considering purchasing a commercial property through your SMSF:
If you lease the property to a business you run, the lease must be at the market rate.
You can’t skip rental payments – payments must be made on time and in full, as if you were leasing from a stranger.
The property must be independently valued regularly.
The investment must be for the sole purpose of providing retirement benefit to the SMSF’s members.
Depending on your circumstances, buying a commercial property through your SMSF can be a great way to grow your wealth, especially if you have a business. If you want to learn more about SMSFs, download an today.