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This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. G'day everyone.
Welcome back to another episode of the Property Nerds podcast. I'm your co-host Arjun, joined by Jack Faraker from Faraker Financial. Today's episode, we're going to get deep into the world of SMSF. This is a topic that I've covered off in the past, and I haven't actually done it though with Jack. And the reason why it's so important to go through it today is more than ever in a high interest rate environment, we're noticing people look into SMSF as an option.
And this is for multiple reasons. One, people from back in the COVID day when the pandemic first hit, they felt that control was taken away from many aspects of life. And post COVID, that control of your financial future, what you want to do, where you want to be, how you want to get there, we noticed a huge spike in that. And so that also corresponded with SMSFs turning up and having much more of a setup, review, questions, even on the search terms. You can search all around for them, that picked up from then on.
But the second thing is that as interest rates have gone up, borrowing capacities really been crippled. And as a result, that's changed people's thoughts on which assets, which vehicles they go to, to extend their borrowing capacity. So we'll talk more to that today. But SMSF, if you're someone that doesn't know what that is, it stands for self-managed super fund. And we're going to look into the deep dive of SMSF.
And essentially the evolution of SMSF property investing. Now you might get, I might trip up on the word SMSF so often because I can only say an acronym so often that cleanly. But the main thing here is that we've seen it pick up, we've seen the questions come in, and you will want the information on this. So we're going to give it to you today in a bit of a deep dive. Now in today's episode, though, first thing I want to point out is that we're going to be going through a research paper that's released on the evolution of SMSF property investing.
And this particular research paper is actually something that we've done very uniquely. We've collaborated with a research firm that's allowed us to get deep into what we call survey-based research and researched over 400 people to come and share their thoughts with us around SMSF, where they are, their thoughts on it. So from that perspective, it's only this place, like you cannot get this research anywhere else because it's custom through the survey responses, designed questions to really unpack what people's thoughts are, the evolution of it, the impact of it, and where they're going to go with it. So can't wait to unpack that. But if you're looking to download it, it's on investikit.
com. au and you can check it out. It's the evolution of SMSF property investing, a free research paper there for you to learn more about how SMSFs are actually transforming the property landscape in 2024. And in that report, we cover off a few things. So one is Australia's retirement plans and I guess Australians' retirement plans and concerns.
The second is superannuation and just the investment of it. The third is SMSFs and retirement planning and how that comes into the mix. And then lastly, you know, the whole FOMO aspect of SMSF awareness because there seems to be a lot of things happening in that space around people's fear of missing out and looking into this as another vehicle. So yeah, just again, it's investikit. com.
au if you'd like to download that research paper. But other than that, let's dig into where SMSF first starts, it's usually on the finance front. Jack, you're getting a lot more inquiries in this space on the world of property investing specifically here for SMSF. Why do you feel that is? What's in your opinion being the biggest reason for people inquiring about this now?
Yeah, there's a lot of different reasons people would spark that conversation and ask the question. One of the most common ones is that they do hit their borrowing capacity limits in a personal name or within other trust structures and they look to their super as a way to borrow because obviously the super that your employer pays or that you pay yourself, it's not utilized in your borrowing capacity outside of super. So it's like a fresh set of eyes of your borrowing capacity based on your income. So that's a really common one. A lot of people are not satisfied with the performance of their super with the retail fund.
So that's a really common one as well. But yeah, I think there are some people that don't want to necessarily invest in their personal name or in other trust structures and they're just happy to kind of get a couple of properties in their super. And there's a lot of tax benefits in retirement when selling a superannuation property. So they look at that as a good option, as a good way to cash in on the way out. And yeah.
Awesome. Now, Jack, we're going to definitely get some experts in the future to join us in different segments of the show, accounting, financial planning, because in the world of SMSF, we can't formally give advice here. And anyone listening to this shouldn't be thinking of this particular episode as advice. It's more just us explaining the landscape of what we see, what the banks do, what the property investing side shows up. And so on that note, Jack, you talked about borrowing capacity, people extending it.
How is it different and why is it different? Yeah. So obviously the super contributions that are being made, that's not something you're utilizing for living expenses or lifestyle. That is going to your super automatically right now. When a lender is assessing your ability to borrow within super, they're just looking at the super contributions.
And you can allocate extra contributions or if you show a history of extra contributions, that'll increase your capacity. But your capacity is quite good, especially if your minimum income, 150K household income, 150 balance in your super. Those are just really basic guidelines. There are outliers. You could even go up to a 90% LVR in a residential purchase.
You can go all the way up to 80% LVR on a commercial purchase. But generally the way they look at it, your capacity is quite good. And if your income is really high, you can be quite aggressive there without it affecting your individual capacity too much. Yeah. So on that borrowing capacity part, that's a really important point you raised because what people should hear when hearing what you've just said is that with SMSF, even if your personal borrowing capacity say maxed out and maybe you had $2 million of personal borrowing capacity and you've utilized that all across investments, your home, and you're done, you're going to get an extra borrowing capacity that's separate to that simply by having the vehicle being in super.
Have I got that right? Yeah. Yeah, that's right. And people like it because it's not something that takes money out of your pocket if you do it right. If you say you have $250,000 in your super and you allocate $200,000 towards the funds to complete the deposit, any fees to acquire the property, and then you've got the $50,000 there as a buffer, that's generally going to cover any negative expenses for years, right?
And so it's not really going to take money out of your pocket if you do it right. And that's why people like it so much. Yeah, because if you've got that scenario, what I'm hearing is you'll have your rental income come in, you'll have money used for the purchase, you'll have buffer left over on that purchase, and then your two, say if it's a husband-wife combo and they're investing, you're going to have super contribution from both people cover the shortfall against that particular property. Yeah, yeah. And generally with a double household income or a high household income on just one side, it'll cover.
It'll cover it. With that contribution going in and the rental income coming out, the buffer is just a formality, but it's only going to get better. But with the buffer, it's good to have a buffer so that you don't have to make extra contributions to your super. Depending on your age, you may want to do that. So, yeah.
And this is where financial planners typically come in and they'll go, well, you've got this much allocated to property, this much allocated to other types of investments to keep it diversified, and then this much in buffer. And so when I'm hearing that, that's a really positive outcome because if we strip it all back and you go, what is this? It's like essentially buying another property, using leverage to your advantage in a fund rather than having it all sit in a singular vehicle with no leverage. And then the third thing is you can still diversify, you can have more control, and the repayments that are there from the negative cash flow that typically exists is not chewing into your personal lifestyle or living. That's right.
So I can just see why so many people are now going, I want to go and set this up, I want to go and do this. Talk to me about the actual borrowing side though. When it comes to now you've got a separate borrowing capacity, is it as different from the cost to borrow, the process to borrow? What changes there? Yeah, so not every lender will do SMSF loans, like the major banks and the well-known banks, they're not really in the space.
So it's a lot of banks that you've probably never heard of, but the rates, because of that reason, the rates are typically slightly higher, not ridiculously higher if your circumstances are good. But yeah, it is a bit of a different process because there is a trust involved, there's also a bear trust involved. So it's foreign to most borrowers and it's actually foreign to a lot of brokers too, a is outside of super, yes, you can get some 80% loans in commercial, but a lot of 70% seems to be the common playing field. So you need more deposit. Now, many people don't have that deposit on the side, whereas if they're in their late 40s as a couple, suddenly their super balance is big enough over life of working that they're in a position where they go, well, we could buy a commercial here.
And that suddenly becomes available to them. But what you touched on is the importance of realizing you can't take equity loans in super. What we come to see and investigate a lot is that when you have superannuation purchases, the style of purchase you can make is actually different to what you'd make outside. So outside of super would be really focused in on going, hey, we need short-term growth drivers that are really strong. We want to leverage that equity.
We want to use leverage loans of even 90% plus to get you into that next property. So you have a larger compounding value base of assets that goes with you over life. Different game in super. In super, we're like, we want to hold this property for 20, 30 plus years. We want to make sure that this property is going to also stand there and be not falling over in that time too, because you don't want to keep going backwards with your balance and repairs, maintenance and stuff like that.
And then lastly, we also want this to be an asset where it hedges the strategies you're doing outside. So to give you an example, let's just say there's properties outside of super where you feel a lot more aggressive or risk management's easier for you to manage and you want to go for it and you want to attack the short-term metrics to see that growth. In the super, we want to do the opposite. So if you're all of a sudden in Queensland for all your investment properties outside of super, we might go to another state for super that doesn't have an immediate short-term horizon that's really, really strong, but we can buy in a good price point. We can get a good place.
We know the long-term stats are really solid there and you're not going to be touching the equity of that anyway for 20 to 30 years. So if you can compound and do its time, different story. And so that's something to look out for that. But when it comes to commercial, another thing we should probably touch on is the SMSF as a vehicle, once positive cashflow, is very different from personal, right? Like when it comes to the tax rates, commercial property is typically positive cashflow when you're buying it.
Now, when it is that in personal names, your tax rates are higher than what you have in SMSF. Now, they'll vary from person to person and what you are personally. SMSF, it's lower as a tax rate than personal. And so what that means is if it's a vehicle that's holding an asset that's likely to be positive cashflow, you're just going to have more of that money in your pocket in the long term instead of if it was in a personal name. It's literally built for retirement.
The government have put this in place for retirement. They're still taxed, but they're not going to slam you with tax on your retirement. This is built for people that are in retirement age. And this is close to me, mate. My parents would have been one of those statistics if they didn't buy property in their super.
This is something that was, man, like I know their situation. I know what they did work so hard. That one investment in their super set them up for good, for good. And seeing that has made me, you know, that's why I know so much about it. Like I followed them along that journey with them and was able to see it happen for them over a period of 10 years, 10 years before retirement, they started doing it.
And they wouldn't be retired. They'd still be working now past 65 if they didn't do it. So this is something that me and my brother, we've both joined forces and we're doing a superannuation investment. We've had it for a couple of years now. And yeah, it's really powerful.
Absolutely. We've seen so many people's lives changed considering it. Now on that stat and super. So we talked about in this report that 65%, this is what we found of eligible Australian households. So we set the eligibility mark at 200K or more balance in the survey.
Now it doesn't mean you have to have that balance to buy property. We've seen people purchase property with us with 150K balance. Even 100. Even 100. Yeah, yeah.
We've seen some people take it. Really high income earners, you can go up to 90% with 100K balance. Like you can still get a property for 600. If you're really high income earners, because at 90%, obviously rates are going to be higher. Correct.
Fees and all that. So you'd want to make sure that you're not going to be having to put so much money into it to make it work. But yeah, it can definitely work. Absolutely. So we've seen that it all depends on the advice you're getting and what you're actually doing with that money and making sure you're weighing up all the fees and charges.
But what we found is if we set for this report here, 200,000 is the balance between a couple, 65% of eligible Australian households are not using an SMSF, which is really interesting. So whilst it's picking up massively as a trend, there's so many people still not using it just because of a few issues that get in their way. And this is what we found. I've not considered using my super to invest in property via a self-managed super fund because I don't know how to do it, because I don't know how it works, and because I don't have enough information on it. 100%.
I was just going to say that, man. That's exactly right. People don't even know what that stands for. They hear it and they're like, what is that? Yes.
Yeah. And so for the rest of this episode, we're going to make sure that we can help you in answering these three questions. So let's go a bit through a little bit of a masterclass and go through a couple of quick points, right? I don't know how to do it. So step-by-step process.
Firstly, you want to consider getting advice on if it's the right thing to set up for you. And that's considering your options of what your current fund's doing, knowing the pros and cons of setting it up. And your starting point could be with your accountant, with a financial planner, because they'll introduce the right people or they are the right person themselves. Second step is once you've gone from the setup, you want to then make sure and you've considered all your options, the fees and charges will be, you want to go through a rollover. So the rollover is when you're then having the support of your accountant or financial planner start to get all the funds from where your super is kept and move it into the actual fund itself.
Third step is consider finance if property is going to be one of the options you take. And in that, that's where you can reach out to Jack's team here. Jack, what's the website for you guys? 4acrefinancial. com.
au, mate. Awesome, mate. And how do we spell the 4acre? F-O-U-R-A-C-R-E. Perfect, perfect.
So have you always wanted to be on 4acres? You reckon that'd be a goal for you now? 100%. 100%. I'm just waiting for that right property that's on the dot of 4acres and I'm getting it.
Generational retirement living there. Chuck that in the super, huh? So that's the next step is getting your finance evaluation. Now, if you're looking to have a professional on your team, this is the step afterwards where you can engage us at investigate. com.
au. Typically for us though, we want to see a balance of 175k or more. It's not because you can't buy under that. It's because we really believe in risk management with the right buffers. We really want you to have the right diversity in your fund and we want to give you suitable options that across the country, you're making the best call.
It doesn't mean you can't invest less than that on your own. You don't have to use us, but this is more just giving you the step-by-step as part of a tutorial. Now that you've got your finance underway, you've got your search starting for the property. This is the part I want to stop here. Everything after this, I want you to think of it as a normal property transaction, right?
Which is you purchase the property. However, on the contract of sale, it won't be your name. It won't be Mr. and Mrs. Smith.
It'll be the name of the fund. And with that fund, some states will have their names change. Some will just have the fund as trustee for another fund. And that's because the bear trust. Some will have the PTYLTD only of a bear trust company.
And I'll get through these technical terms. But the main thing is just taking a step back and realizing this. Your superannuation is taking a loan out. And so to manage the risk of it, it separates that risk by having an entity that's liable for the loan, not the whole fund itself. It's called a limited recourse borrowing arrangement.
That's it. And with that, you're able to then have what's called a bear trust set up. And to avoid the confusion, just basically tell your accountant, I'm purchasing a property. Here's the address. Here's the location.
What do you want me to put on the contract of sale for this specific state? Because it varies from state to state.
