21 Aug Buying an off the plan (OTP) property within your SMSF
Buying off the plan means you are buying at today’s prices for tomorrow’s market. While there are many benefits of an OTP property there are also some additional risks you need to consider when buying through a SMSF. This article covers some of the benefits and risks of such a property acquisition.
What are the benefits of buying off the plan?
Buying OTP has many benefits for investors;
1. You only need to outlay 10% of the property purchase price upfront plus some legal costs. At settlement you pay the amount outstanding plus any stamp duty. Your SMSF may benefit from the equity growth throughout the development period which could take up to 12 months or even 2 years, yet had no holding costs throughout this construction period.
2. An OTP property buys you additional time to accumulate more money within your SMSF to create a larger buffer or safety net which protects you when borrowing to invest.
3. When you borrow to purchase a property within a SMSF you can not increase the loan amount in the future if required. What this means is that, if you buy an existing property which may require a renovation or improvements you can not borrow to fund this work it needs to be funded by existing cash funds which could place added capital pressure on your SMSF. With an OTP property purchase, the need for renovations will be many decades down the track. The builder will also provide a builders warranty which usually lasts for 7 years reducing the risk of needing to spend money improving the property immediately after the purchase date.
More than half of those surveyed, 54%, have said they allow their employer to choose which fund they were using, 37% did not know their Super balance and 80% had no or only a vague idea of how much their fees were.
However, the most concerning statistic for me has to be that 77% said they had not or were unsure if they had made a decision on where their Super is invested.
What are the Risks?
1. The deposit (usually 10% of the purchase price) is held in a solicitor’s trust fund, it is not held by the developer. Many investors think they could lose this deposit if the development does not complete or the builder goes bust. However in reality the deposits are refunded to the buyers, often with interest earned if the project does not complete.
2. The other risk is obtaining finance at a future date, when the property is completed. You do need a finance strategy to be in place as full finance approval is not available when purchasing. The property is held under contract with a 10% deposit. As approvals by the banks only last 3 – 6 months, it is recommended that preserving your borrowing capacity during the development phase is essential. Travelling overseas, quitting your job, starting a new business venture or anything that may weaken your position for borrowing within your SMSF at completion is not recommended.
3. There is the risk the property value may fall during the construction phase. As the bank will only provide approval within 3 – 6 months of the completion date, there is a risk the valuation may be below the actual purchase price. If this occurs you will be required to fund the shortfall from within your SMSF, or make additional contributions into your SMSF.
Have a Buffer
As part of your risk reduction it is important to have liquid funds within your SMSF to pay for the property plus any unexpected event along the way. Having a contingency buffer for variations such as a lower valuation is also strongly recommended.
For investors who want to add to their portfolio by buying an OTP property it can prove very beneficial if you follow a simple strategy. Buying in a rising market, with a long settlement time, paying a fair market price, having a finance strategy and a contingency buffer can make the process very worthwhile.
If you would like to learn more; book a one on one meeting with a SMSF Coach.