A recent release from technology experts GlobalX has warned people of certain things they should be aware of before dipping into their superannuation funds. There are many pros and cons to having both commercial and residential property in your self-managed superannuation funds.
What is a liquidity buffer?
GlobalX warned of the importance of having a liquidity buffer at the time of purchase when investing both residentially and commercially. But what exactly does this term mean?
GlobalX Chief Marketing Officer, Rafe Berding said: “We are seeing an increase in the number of people looking to their self-managed super funds to invest in property. This is due to several reasons around the current play with the financial institutions and the recent share price performance. Certain considerations must be made though and one of them, which you did state, is the liquidity buffer. What this means is you must have 10% of the proposed investments value as a liquidity buffer.”
What regulations are there surrounding loan documentation?
With the number of rules surrounding loan documentation, and the pressure to get everything correct, it is important that you have someone who is familiar in this area. Without the right know-how, you can easily come unstuck. For example, you can’t put a property in the super and then have yourself of a relation living in it.
Rafe explained: “There's a lot of different rules that must be met around complying with investing in property through your self-managed super fund. You must meet the sole purpose test and that means providing retirement benefits only to fund members. The property cannot be acquired by a related party and it cannot be lived on or rented by a related party as well. There's a lot of different formalities around the setting up of the self-managed super fund and more importantly, about getting that loan and that's where you really need to seek that independent legal and financial advice.”
How do these rules differ for commercial property?
The rules on occupying premises differ from residential to commercial property. Businesses are allowed to have their commercial premises in their superannuation fund while occupying it themselves.
Rafe said: “Commercial property is different. If you are looking to add that to your portfolio, best to speak to your financial and legal adviser as well, because there are other certain risks around investing with your self-managed super funds that include higher costs around loans and includes cash flows and it includes the possibility of it hard to be able to cancel that contract.
“For instance, if your self-managed super fund loan documentation and contract is not set up correctly, unwinding that arrangement may be a lot different than your traditional loan with your bank.”
Who should you work with?
When dealing with this kind of stuff, you should be working with a solicitor and accountant, as well as your whole team. You need people who are familiar with the rules and regulations surrounding investment in self-managed superannuation funds, otherwise, you could find yourself at a huge disadvantage.
Rafe agreed: “It's not around your risk portfolio and your investment, but it's also around ensuring that you have considered everything from all the costs to your exit strategies as well and that's best sought not for your financial adviser but also from your legal and conveyancing professionals and second to that, it's really about understanding that it is a more highly regulated process and it is riskier in certain elements, so it's imperative that you really do understand your responsibilities in managing it as well.”
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