Buying apartment blocks with your SMSF
Developers and high net worth individuals have always been the typical buyer demographic for blocks of apartments. But today, they are increasingly competing with a new type of buyer – mum and dad investors purchasing through self-managed super funds (SMSFs).
Let me give you an example.
Not so long ago, one of our agents, Ben Collier at McGrath Edgecliff listed a fantastic art deco block of eight apartments in Barry Street, Clovelly that attracted many SMSF buyers.
The gross returns were $264,160 per year and there was scope to raise the rent and add value with extra parking too.
Ben expected a sale price around $7 million but strong competition at auction pushed the price to $7.52 million. While the property did end up selling to a developer, three of the under bidders above $7 million were mum-and-dad investors.
Now, $7.5 million is a big price tag and a budget that is simply out of reach for most people. However, when you’re buying with a SMSF, you typically have more money available to you for the deposit than you could have ever achieved through regular savings.
This is especially the case if you’re in your 40s or 50s and have been receiving mandatory super payments from your employers, plus your own contributions, since super was introduced in 1992. That’s 24 years of accruing at least 9% of your income (9.5% from FY15), with compounded interest and potentially other gains made from good investments over the years.
This means, depending on your income (and how hard your nest egg was hit by the GFC), you probably have more than adequate funds for the deposit on an investment property.
Recent statistics from the ATO shows that property investment via SMSFs is an increasing trend.
As of March 2016, there were 572,424 SMSFs belonging to 1,085,286 Australians.
Over the five years to March 2016, the amount of superannuation money invested in residential property has increased from $14.6 billion in June 2011 to $24.4 billion today – that’s a 67% increase.
Most SMSF buyers still need to borrow to buy a property through their fund, and getting finance for an apartment block purchase is more complicated than single homes.
I asked Alan Hemmings, General Manager of Oxygen Home Loans (the mortgage broking division of McGrath) to give us his advice.
- Only a limited number of lenders will provide a residential loan for a block of up to six apartments, but they must all be held on one title (ie not strata titled).
- In assessing serviceability, these lenders tend to be conservative and might only use a percentage of the actual rental income the block is returning to calculate whether you can service the loan.
- Blocks with more than six apartments are considered commercial developments so you will have to use a commercial loan, which means a shorter loan term and a higher interest rate.
- Banks typically apply an 80% LVR cap on all SMSF property purchases.
Buying a block of apartments presents many exciting opportunities for investors, but it’s hard to do in major cities because big money is usually required to secure the block in the first place and blocks don’t come onto the market too often.
There are usually more options in regional markets, where purchase prices are lower and yields are typically higher than the cities.
A regional block won’t get the capital growth of a city block, but that might not be your aim. In retirement, many people just want to be debt-free with a few income assets to fund their lifestyle. So a regional block of apartments delivering a high rental return might be an excellent option, as long as the loan is small enough for you to pay it off before retiring.
For this strategy to work, you would need to buy in an area with a low vacancy rate over the long term, low unemployment, decent population growth and a diverse local economy.
Getting good advice is crucial when buying through a SMSF.
First, talk to your accountant as they’ll be able to advise you of the set-up and ongoing costs, including mandatory annual audits.
Then talk to a broker who really knows the ins and outs of SMSF investing to secure your loan.