Who has not heard a 100 times that rent is dead money. That might be the case unless you are paying it to your own superannuation fund (SMSF).
Many business owners don’t realise that they could use their superannuation (and their spouse’s super) as a deposit to purchase a premises for their business to operate from.
Consider the following example, which could apply in almost any industry for any commercial property from shops to factories, through offices and farms:
A couple run their small business from a warehouse worth about $600,000 and currently pay their landlord $39,000 (6.5%) per year in rent. They have also accumulated $200,000 in superannuation over the years, which in average would have grown by 2.3% over the 2015 – 2016 financial year (http://www.smh.com.au/business/markets/the-sorry-state-of-returns-from-superannuation-funds-this-year-20160701-gpwk3e.html).
Instead of having these funds invested in an industry or retail funds, they could have used it as a deposit for their SMSF to purchase a new warehouse for them to run their business from. Their SMSF could then approach one of the many commercial lenders offering SMSF loans and borrow up to 75% of the value of the warehouse to complete the purchase.
They would have stopped paying rent to someone else and start paying a rent which would be used to pay off the property, potentially taking a big step toward setting them up for retirement:
- SMSF Loan amount – $450,000
- Term – 20 years
- Monthly payment – $3,224 (vs rent of $3,250)
Without using any future contributions to their SMSF, the fund can pay the SMSF loan within 20 years just using the rent, not even factoring in any inflation or rent increase. Conservatively assuming that the property would go up in value at an average 4% p.a. in the meantime, in 20 years their SMSF would own outright, a $1,314,674 property.
As none of their normal contributions were used in the process, they would have been able to invest in other assets through that period and accumulate even more.
Aside from the financial benefits to their SMSF, being their own landlords would also provide this couple more certainty about their business premises and more flexibility and confidence to invest in the building, allowing them to tailor and optimise it for their business.
This strategy has been very popular in some industries for quite some time, particularly medical professionals and accountants, but can easily be duplicated by anyone currently running a business.
Many self-employed people have not been contributing to their superannuation consistently over the years and may have a low balance. Depending on your circumstances, this strategy can even be achieved without having a high balance in superannuation, as an SMSF can borrow from multiple sources to purchase a property using a hybrid structure.
Whatever the state of your super, if your business is currently paying rent which is “dead money”, call SMSF Loan Experts on 1300 781 680.
* The information contained in this blog is general information only. No part of this blog is to be construed as a solicitation to buy or sell any security or financial product. The author, in preparing this blog, did not take into account the investment objectives, financial situation and particular needs of any particular person. Before acting on any information or advice in this document, you should consider the appropriateness of it (and any relevant product) having regard to your circumstances. You should also seek independent financial advice prior to acquiring a financial product.