Melbourne Property Investment Criteria

What is a Self Managed Super Fund - A self managed superannuation fund ("SMSF") is a superannuation fund which can provide the members of the fund with a greater control and choice over their investments providing security and peace of mind. To hold direct property within your superannuation portfolio you must create a SMSF.

Timeframe and Cost - A SMSF can usually be set up within a week and range in price from $1,000 to $1,750 depending on whether a trustee company is required. If you are going to borrow a portion of the purchase price then the set up costs can range anywhere from $4000 to $15,000 depending on the type of leverage product you choose.

Self Managed Super Fund and Leverage - In the past a SMSF was prohibited from borrowing except in limited circumstances. However in 2007 the rules associated with SMSF borrowing were amended which now allow an SMSF to borrow more generally provided the rules set out in the regulations governing superannuation funds are strictly followed. These include but are not limited to:

• The borrowing must only be for the acquisition of an asset that a SMSF is allowed to acquire and would include a residential property from a non-related party or commercial property from either a related or non-related party. It should be noted that a SMSF is not allowed to acquire a residential property from a member or related party.
• The asset must be held by a separate trustee known as a security trustee or fixed trustee. The SMSF must be able to gain the legal interest in the asset by making one or more payments. Any income such as rent accrues for the benefit of the SMSF and not the lender or the security or fixed trustee.
• Any borrowing undertaken by the SMSF must be a non-recourse loan meaning the rights of the lender are limited to the particular asset in question. That is if the SMSF defaults on the loan the lender can only recover the amount outstanding from that asset and not against any other assets of the SMSF.

For this reason financiers tend to have stricter rules in terms of the ratio of borrowing to market value of the property and generally tend to only lend approximately 60-70% of the value of the property. This is not a hard and fast rule and you maybe able to negotiate a better ratio from your particular financier.

Please note the above is a general commentary only and should you be interested in pursuing anything to do with the above you should seek your own professional advice before establishing a SMSF or borrowing or acquiring an asset.

This information is current as of 1 August 2010.