This transcript was generated automatically and may contain small errors.
SMSF, the first word is self. You want to do more things with your money. The non-bank space in general is going to start to flourish. It's like a back of the napkin. Beautiful house.
And what you can already see from this drawing, by the way, is Jack should not be in architecture or design. Hang on, mate. The houses didn't have a window, didn't have a chimney. The door's a bit crooked. It doesn't matter, mate.
Don't worry about the dog's breakfast of handwriting. All of these scenarios, they're 80% and 70% LVR. Really taking you to the finish line, your long-term wealth strategy from an income point of view. If they're not going to perform well, that contribution could have been growing your balances. It's wasted.
What sort of household income do you need to be on? I wish it was as simple as that. What's the answer? Give it to us. It really depends on a lot of things.
Nerd alert! Property nerds. The home for data-driven property investors. Where we uncover Australia's hot and cold markets, latest headlines and trends. We're back for another episode of The Property Nerds.
And by popular demand, it's all talk on SMSF. But this time, instead of SMSF as a topic, setting it up, actually using it, we're talking lending side. Because when we talk lending, it'll just help unlock a lot more thinking around what the dollars can do, how much the ins and outs are, and what's possible in SMSF. So if you're tuning into this episode and you're wondering, how much could I potentially borrow in SMSF? What are the numbers and the ins and outs look like in SMSF?
Residential versus commercial? Then you want to stay to the end of this episode. Because again, we're doing another whiteboard special with Fouracre. Is that the name of it? The Fouracre whiteboard special?
We'll have to figure something out. We've got to call this. This is the second time we're doing this, having some good fun. And if you're listening to this on Spotify, SoundCloud, Apple Podcasts, or anything like that, and you want to jump in, you want to watch Jack talk through his magic on the whiteboard, jump on our YouTube channel, invest a kit, and subscribe for more videos that are to do with property nerds. But also just overall, we cover off a lot of other content on there too.
So Jack, let's talk SMSF. And particularly, I want to understand some of the new policies in, because the SMSF world keeps changing for two reasons. It's getting really popular. And two, as banks fight in that popularity, the competition creates more fight for their business. So what's changing?
What's happened in SMSF of late for lending? Yeah, well, there's more lenders coming into the space. We've talked about it previously about lenders getting out of trust lending and stuff like that, which means that the non-bank space in general, even outside SMSF, is going to start to flourish even more than it already is. But that's going to have some flow on effects to the SMSF space because those non-bank lenders that come into the space to compete, they quite often offer SMSF products. So it's going to get more competitive, which means that the rates are going to get cheaper over time.
So it's all good news. Keen to dive into it. There's a promotion at the moment where you can do 90% LVR without any risk fees or LMI, which is really good. Wow, LMI waivers come into the world of SMSF. Yeah, yeah.
So traditionally at 90%, you're looking at like 3. 5% as a risk fee on the purchase price and then 2. 5% at 85%. So it's significant as a cost just to enter. So the fact that that's waived at 90% is great.
So it's not like it's just... Is it profession dependent or anything like that? No, no. You got money in your super, you can borrow, you're good to go. But it's not something that we do very often because it's not like you necessarily need to do a 90% loan for most cases.
Like most people that are even interested in SMSF, it's a couple, they've got household income of 160,000 or something like that. They've got a decent balance anyway and it's unnecessary to go to 90% because if they're not charging you LMI or a risk fee, then they're going to make it back on the rate. So it is a high rate, but you could refinance it at 80% with a better rate within a year or so. So it's a good short-term option for some people that either want to be really aggressive and stretch out their funds to get a second purchase after just putting a small deposit down for the first one or for people that have a low balance but really high income that just want to maximize the leverage on their first property in super. True, that's a big one because sometimes people, like give an example, people move to Australia in their 30s or 40s.
They get high paying jobs and they come in, they become PRs and citizens, but even with those high paying jobs, their super balances might not be very high. And so as a result, they're able to then get into investing because of these lower deposit, high loan to value ratio because I've seen some interesting scenarios. I've seen some people in their 40s, a couple earning 200 each in IT and different parts of roles. They've moved over from the Northern Hemisphere and they come from many different countries and they come here with specialized skills and then working here. But then their super is like 150K between them.
And you're like, interesting. That's a perfect example, right? Definitely, yeah, we definitely see that. And they've even done that and paid the risk fees because they know they've got significant servicing. They're just really restricted by the deposit, but they want to be aggressive and they want to go into it.
That's a perfect example for someone who could benefit from that. Got it. Now, that's one core new policy, which is a big one in the SMSF space. Basically, LMI waivers for all if you can service it and if it makes sense. Are there any other new things that have come out to the world of SMSF of late when it comes to policies or things like that?
I know there's some things in the commercial property world when it comes to loan to value ratios that you see. What's happening there? More and more lenders going up to 80% LVR for commercial securities, which it hasn't been. If you think back to five years ago when podcasting was pretty new for property and it was just popping up everywhere. When they're talking about commercial and things like that, you'd get excited at a 75% LVR and you'd think, whoa, what's going on?
But then it'll be a 15-year loan term. To think that in super, you can get an 80% LVR and a 30-year loan term, it's just best case scenario for people that really want to leverage into a commercial asset like that. When you think of people getting into that, it's like, okay, firstly, commercial is the end game from a portfolio. Commercial or other asset classes, that's the end game. Very rarely is debt-free residential unless you're cool with a smaller passive income and smaller usage of the value base.
It's going to get you the dream passive income you're after. Definitely not. When you know that you can now get high leverage for it, you can get into a vehicle that's quite tax effective, it starts to make a lot of sense. Can we jump onto the whiteboard for a commercial? Let's go.
Can you take us through the commercial side? I think we should start with the residential side. Let's go residential. Most people are going to start residential and then end up to commercial. We'll start with the residential scenario that we've done up.
Sorry about the wheels. Are we covering with residential? Actually, this is a good point. What we're covering off here for those watching and for those listening in, don't forget to jump onto InvestorKit YouTube channel and check this out. Jack, what we're jumping on here is giving someone almost like a back of the napkin, borrowing capacity and funds to complete type scenario for if they're purchasing a commercial property.
What you can already see from this drawing, by the way, is Jack should not be in architecture or design. Hang on, mate. If anyone saw the last episode, the houses didn't have a window, didn't have a chimney. True, true, true. You've made some significant renovations.
You've made some renovations, but your windows are tilting. Your windows are different sizes. The door's a bit crooked. It doesn't matter, mate. You know what's crazy?
Everyone universally was taught that house drawing up when they were kids. If you're born in the 90s, every house that your 90s kids stuff, like no, it was that. I know windows at the bottom though. I don't know what's going on there. Tune into our podcast for real life case studies, the latest data, and even expert guidance on residential and commercial investing.
It's everything you need to stay sharp straight from the field. Make sure to like and subscribe to get insights that only we have. And now let's get back into the show. But anyway, I thought we'd start with the residential scenario because most people when they're going into super start residential, right? And then they use the growth in the residential to get another one.
And they eventually, close to retirement, they sell off the residential portfolio and enter into super. So we'll go into the commercial side after this. But just working off a 600K residential property, funds to complete with buyers, agent fee and everything like that, you're looking at about 165,000 as a combined balance between the household or an individual You personally aren't required to put additional contributions into the fund to service it. Which is why the household income number is important because technically the contributions of the household income would go towards it, right? That's right.
We're not using that for servicing outside super. Absolutely. Now we're on to the commercial part. But before we go into the commercial part, when we're showing you these residential and commercial scenarios, it's important to note that it's not from a perspective of like, this is advice of what you should go and do. This is just us going through general numbers that we see quite often as professionals in the space that we're in.
And so people can see what it just looks like. It doesn't mean we're saying you should go purchase property using super, you should even set up a super, speak to a qualified licensed financial professional when you're making that decision. So this next scenario, Jack, we're talking commercial. And this big thing is off the back of the things that you mentioned earlier, which is commercial is so common back in the days, five, six years ago, 60, 70% loan to value ratio, which meant very cash heavy. And then we also know that commercial is a big end vehicle.
And so people with the right super balances who want to consider commercial in the mix of their portfolio, not only do you have it in a tax effective vehicle, because it's less tax rates in super than it is outside of super, but then you also have your contributions, a high level of rent. And in this case, potentially 80% loan to value ratios, if you can service it, really taking you to the finish line of your long term wealth strategy from an income point of view. Yeah. So don't worry about the dog's breakfast of handwriting. Hey man, it's better than mine.
There's no pictures, eh? No pictures. We'll have to get some pictures incorporated into this next time. But we've got purchase prices here, funds to complete requirement there, repayments and yield outcomes here. So just got 2 million, 2.
5 million and 3 million. So just on the 2 million purchase price on a commercial, the funds to complete at an 80% LVR is 480,000, not including buyer's agent fee. And at 70%, you're at about 680,000 funds to complete. Now on a 80% scenario, the repayments interest only about just under 120 grand. And for 70%, it's at around 90 grand.
So a 6% yield on a $2 million purchase net 120,000. So that's covering itself. The rent is covering the repayments. And we're not even talking about contributions. So this is interesting.
So what we're basically saying is if you have the surplus super balances and you're in that 680 plus, of course you can have that 30% down and be positive cash flow from the get go on interest only in a tax effective environment. But if you did use the funds to 80% to get the power of leverage to get into commercial property earlier, you're controlling a $2 million asset. And at a 6% net yield on that commercial property, you're covering the interest rates and the interest only loan on a $2 million purchase price at 80% loan. So it just shows you that even if you did stretch the loan to value ratio up, which is more common now in SMSF to 80%, you could still get coverage and your contributions left to the side can grow the fund, but you're controlling a $2 million asset. Yeah.
And we've had some high income professionals go straight into that without even going into residential. They just go commercial straight off the bat. They're like, look, I've got half a million in super, really high income earning. The rent covers the repayments, which means that their super contributions just go directly into the fund and build up faster than if it was a residential. And they basically can generate another deposit for a smaller residential to again, have exposure to capital growth and eventually sell that to pay off the debt or sell it to buy something bigger.
But it's much the same when you go down to two and a half mil, 600K funds are completed at 80%, 850K at 70%, 150,000 repayments at 80%, 150,000 6% net yield. So the theme still continues at 80% loan to value ratio. As you increase the purchase prices, as you increase the yields, you're still going to get coverage from the rent in comparison to interest on today's rates. That's right. And that's the same for a $3 million purchase.
Obviously the funds requirement goes up, but the rent also goes up. So rents can go up, contributions not factored. And look, I know interest rates can go up or down, but potentially could go down. And then all of a sudden you're like, I had in that third scenario, $3 million purchase price, you put down almost $300,000 less as a contribution just to get a holding of that $3 million asset, which is pretty wild. Yeah.
But like rents, like you said, rents are going to go up with the commercial lease. So I mean, all of these scenarios, they're 80 and 70% LVR, right? So for the average mom and dad investor that have a modest household income from modest beginnings that just start with a little old balance, go and buy their first residential property. These LVRs aren't in the future, right? The strategy for people like that would be to buy their first residential one, look at getting a second one, potentially a third.
When they're closer to retirement, selling off all of those residential assets and then going into a commercial asset like this, but at a much lower LVR because they've got a huge deposit that they've generated. But their borrowing powers would be really good because the rent's still really strong. You only need to borrow like 50% on the property. Now, I might put you on the spot for this next question. Obviously, we have started seeing a few more customers as well, and we've always had them, but much more in quantity of late with balances where like $600,000 to $1 million in supers is common.
And where they start having these balances as a couple, obviously having the balance, the purchase price, and the rent. These are three things that are tick because purchase price is there. We know we can get deals in that area. They have the balance. They have the net yield.
But when you're talking household income from contributions, because obviously the banks don't just rely on the rent of the property. They also want to look at your contributions. What sort of household income do you need to be on to be able to take a $3 million commercial purchase? Say they've got the million in super. They've got 720 they want to use towards it, like 80%.
They can clearly cover the rent with the interest at 180 passive income from the rent for 178 of interest. So it's covering itself. I wish it was a simple answer, mate. What's the answer? But it's not.
Give it to me. Because it really depends on a lot of things. So there's a big group of lenders that are really common in that 80% space that would cap the amount of super contributions that you could use for the purposes of servicing to 30K per client. Got it. Right.
So once you get above that, there's options to look at your servicing outside of super to see if you've got capacity outside of super to make additional contributions. Because they're not looking at actual rent, actual repayments. They're looking at shaded rent assessment rate on the repayments. So although it might be positive, even on 80%, they're not looking at that. Once they add in the buffers and the assessment rates, it's going to be negative.
So once you cap out of that 30K, they can look at your personal assets and liabilities to see if there's additional contributions there. And if you're a really high income earner, you should be able to make it work. But if you've got a huge portfolio and you're tapped out and then you try to go ultra aggressive like that, it might not go in your favor. But I think the key there would be maybe just a smaller purchase price or two with the residential side. Because then you just go back to that strategy of holding the residential, looking to sell those and generate a large deposit so that when you do go commercial, you've got those big deposits, but then you only really need to borrow 60, 50%.
And then you've got more options, better rates, and yeah. Makes sense to me. And so from that perspective, that just shows for everyone watching or listening in, like with commercial property, it's a lot more flexible and super than it has been in the past as a policy there for 80% loan to value ratios. Secondly, residential property gives you a bit of the back of the napkin numbers of certain funds, balances, purchase prices there. But 90% LMI waivers, risk-free waivers, that's a big game change in the SMSF space.
It definitely offers because like the whole part of SMSF, the first word is self. So when you're self-managing, like to me, it's like you want to do more things with your money. You want to have more choices. You want to explore more assets. You want to explore.
If you now have 90% loans and you can service it, your rents and contributions are able to cover the shortfall. You feel comfortable with it. Your household income is high enough. That just means there's more money in your pocket that you can go and use other assets in. And to me, like from a super perspective, you're diversifying, whether it's shares, whether it's, you know, speaking of other assets, one person probably listened to this podcast here today.
He made a killing with silver and like just crushed.
