Many self-managed superannuation fund (“SMSF”) investors are interested in smsf investing in overseas property and request information on purchasing a property in the United States (“US”) through their SMSF.
This has been a popular strategy in the last 5 years with the global financial crisis and defaults on mortgages in the US resulting in ‘cheap as chips’ real estate in the US. As a result, many ‘turn key’ operators have focused on purchasing real estate in the US with a significant influx of SMSF investors. In addition to the cheap real estate, the AUD v USD has been above parity benefiting Australian investors. At the time of writing this blog, the USD has strengthened against the AUD with the AUD holding at 93 cents, with continued predictions of a decreasing exchange rate to approximately 80 cents in the last 12 months. Many economists have been left with egg on their face as they predicted a massive correction in the AUD in early 2014.
The Superannuation Fund legislation and regulations does not specifically prohibit SMSF’s from investing in overseas properties and it’s important to include this in your stated SMSF investment strategy.
However, there are some restrictions, particularly in relation to using finance rather than cash to purchase a property. Many US Finance propviders are reluctant to open a bank account for a non-US citizen let alone provide finance for non-US citizens. We have seen a relaxation in recent months with SMSF’s successfully obtaining finance.
We emphasise, it is important to seek advice from a SMSF professional and/ or lawyer prior to structuring and purchasing a property as there are important structuring considerations (and costs) both in Australia and in the international jurisdiction.
Firstly, lets discuss important considerations in investing in US property and overseas property.
Purchasing Overseas Property Considerations:
- Travel costs – Generally SMSF members travel to the US or overseas locations to inspect and purchase property. Obviously there are costs involved in sourcing the properties usually on a tour from a property promoter. In order to claim travel expenses, the SMSF members/ trustees must meet a number of conditions and it is important to seek advice before you claim these expenses.
- Trust Deed and Investment Strategy – The SMSF Trust Deed and Investment Strategy must permit the investment in overseas real estate. Ensure you have an up to date Trust Deed and Investment Strategy with an addendum detailing the US property purchase.
- Sole purpose test: As we all know, investments must be made for the purpose of providing retirement benefits to members, a quick summary is that you cannot live in the property, and ensure you have a property manager to manage the property while you are away. All auditors will look for an external property manager. Please ensure you perform due diligence on property managers in the overseas location, there have been many horror stories of fraud performed by the property manager.
- Structuring considerations: the structure will generally include a Limited Liability Corporation (“LLC”) and may involve a “bare trust” which give rise to Australian and US tax considerations. It is important to understand that there may be federal and state taxes applicable to the purchase. Seek advice for structuring and accounting considerations both in Australia and the overseas jurisdiction.
The above details the key considerations prior to investing in the US. A key point is to ensure you perform due diligence on the property provider that you have/ may align with.
Key questions to ask are:
- Which cities/ states do they recommend investing in
- Many turn-key operators are currently promoting Atlanta, Georgia and Orlando, Florida. If a promoter is supporting Detroit, they have rocks in their head – stay away. Ohio is now becoming popular also.
- Experience in US real estate and their team on the ground i.e. do they have alliances with local property managers, valuers, banks, accountants and tax advisors?
- What are the Costs involved? Both in Australia and the USA.
Although property may be ‘cheap as chips’ many of the areas promoted are referred to as ‘slumlords’, that is a high yield however a low demographic. There is a high turnover of tenants, risk of non-payment, high property management costs and risk of damage to the property. If the property is damaged, you may be asked to travel to the overseas location and recover rent or inspect the property after damage. Please include these considerations in your “net” return.
Ivan Filipovic is a Director at Redwood Advisory – SMSF Specialists and can be contacted on 1300 790 110 or firstname.lastname@example.org
The content has been prepared without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. Individuals should seek professional advice prior to investing in overseas property.
Image supplied by Verde Homes