We’ll be very blunt here…
So that we’re not wasting your time and you can find out When Purchasing A Commercial Property With Your SMSF Makes Sense for you, here are your answers.
When it fits into your investment strategy.
Not when you want to or when you feel like it.
Not when a family member or friend buys a business and you want a piece of the pie, so you buy a property.
Not when you live in a mixed residential/commercial residence and you want to buy downstairs.
The only time you should purchase an investment property of any sort, with or without your self managed super fund (SMSF), is when it fits into a pre-determined investment strategy.
If you don’t have an investment strategy, you might like to visit a financial adviser to get started with one. This could save you a whole lot of time, stress and frustration.
If you would like to manage your own superannuation, or simply like to be informed, keep reading.
So, why would a commercial property fit into an investment strategy?
Let’s look at the main reasons:
- Diversification.
- Risk/Return balance is right.
- Fits your investment time frame.
- Provides significant benefit to your retirement plan.
1. DIVERSIFICATION AND YOUR INVESTMENT STRATEGY
As your financial adviser will tell you, it’s important that your fund is not invested in one asset. If you do choose to purchase a commercial property with your SMSF, you need to be sure there are funds remaining to invest elsewhere.
You can even borrow to invest in commercial property, but there are implications to that route as well. There are fewer lenders providing SMSF loans due to the small marketplace, and restrictions becoming tighter. This can mean higher interest rates and higher deposit amounts.
It also means the smaller lenders may approve loans without ensuring you have the proper security and available assets in your SMSF should you have to sell.
However, a commercial property investment may be a great way to diversify your SMSF.
2. RISK AND RETURN
As with any investment, you must do an analysis of risk and return, and determine if the risks fit your appetite, and the returns outweigh them.
First, let’s take a look at some of the risks:
- Be sure you completely understand all the costs of purchasing as well as ongoing costs. Your SMSF may be subject to some additional costs to purchasing, and then there will ongoing costs like payments on the loan, insurance and maintenance. Any rental income plus your SMSF contributions must be able to cover all these costs.
- Commercial properties can have different insurance obligations, so be sure you understand the requirements and any additional costs related to those.
- If your business isn’t the one renting the property, there is a risk that you won’t have a tenant at certain times, which means no rental income. You need to be sure to have enough balance in your fund to cover maintenance and any costs like interest or loan payments.
- Remember that interest rates fluctuate, so cash flow can be affected if you’ve borrowed to buy.
- Take steps to fully understand factors like capital loss, if the property market goes through a downturn; and capital gains, when you sell the property.
However, on the other side of that coin are the returns:
- If chosen properly, property can be more stable than other investments like share markets.
- A quality investment property can bring benefits in the form of cash flow from tenants.
- Commercials properties often come with long-term leases, so there is added stability in knowing you will have a long-term renter.
- If you’re a business owner, there are benefits to purchasing a property and then leasing it back from your own SMSF. You do have to pay rent at market value, but you’re not paying rent to someone else. If you keep the business viable, you will have a tenant until you retire. And, you’re basically paying your future self instead of a landlord!
- Rates of taxation are beneficial compared to other investments. For instance, rental income is 15% during the accumulation phase of your SMSF. When the SMSF moves into the pension phase, taxes move to 0%. As well, capital gains is set at 15% in the first year and then fixed at 10% following the first year.
3. INVESTMENT TIME FRAME
Property is a long-term investment. It’s an asset that can’t be liquidated quickly.
Money invested in the share market, for instance, can be liquidated if the need for quick cash arises. You simply sell shares.
You can’t quickly sell your property or a portion of your property if you’re in need of cash. In fact, it needs to be considered a long-term investment so selling off quickly isn’t wise.
It’s also beneficial to consider the timeframe until you plan to retire, to ensure the timing is right for purchasing commercial property with your SMSF.
4. SIGNIFICANT BENEFIT TO YOUR RETIREMENT PLAN
Any investment strategy must benefit the SMSF holder. If you’re a business owner, purchasing a commercial property can also help business growth.
That’s because you can lease the property back to your business, as long as you pay current market rent on the property. It also gives you, as a business owner, the feeling of control by owning your property, while knowing that it’s also supporting your retirement goals.
Purchasing a commercial property may also make sense if you’re building a property investment portfolio. Purchasing commercial property will add some diversification to the mix.
And as a retirement plan, it might make sense based on the considerations already mentioned: diversification, good risk/return balance, and a long time frame for you to invest.
Final Thoughts
Now you should better understand the different variables involved in using your SMSF to purchase a commercial property. If this is something that interests you, it’s best to seek advice from a professional before making any decisions.
In the end, you may find that purchasing a commercial property with your SMSF makes sense for you and your retirement goals.
This blog article provides general information only. The content does not take into account your personal circumstances, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. Financial Framework has representatives that are authorised to provide personal financial advice. If you have any questions, please contact us.
