Are you thinking about buying USA property or overseas property using your SMSF? Find out how with Redwood Advisory. Contact us for a FREE consultation to understand the key considerations in investing in the USA using your SMSF
You can achieve financial freedom at a fraction of the cost of Australian property
Why is USA Property so attractive for SMSF Investors?
Redwood Advisory has assisted many Australian investors (and promoters) to structure their SMSF property purchase in the United States (“US”) and around the world.
The Global Financial Crisis caused a massive flow of USA Property due to foreclosures 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 as chips real estate, the AUD v USD has been above parity benefiting Australian investors. At the time of writing, the AUD V USD was hovering at $0.80 with analysts forecasting a fall to around $0.70. Further, with the ‘housing bubble’ in Australia with average house prices exceeding $400,000 in most capital cities, the low entry point in the US Market attracts SMSF
The Redwood Advisory Advantage
Known | Experienced | Trusted
“Redwood advisory will provide independent, unbiased, expert advice on the usa property market – we have assisted many australians to structure their investment – compliant with superannuation law”
How do I structure my SMSF purchase?
The Superannuation Fund legislation and Regulations do not specifically prohibit SMSF’s from investing in overseas property however there are a number of complex steps to be followed to ensure your SMSF is compliant. There is no point investing in the USA to source cheaper property if you do not structure the deal correctly, resulting in a non-compliant SMSF with ATO financial penalties to follow.
You can invest in USA property using cash (i.e. your existing SMSF cash) or by Financing the transaction. There are now a number of lenders now allowing SMSF to obtain loans of up to 60% Loan to Value Ratio on SMSF Purchases across the USA.
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 United States.
Firstly, lets discuss important considerations in investing in USA property and overseas property. They are:
Due Diligence/Travel Costs
Every SMSF investor should conduct sufficient due diligence prior to purchasing a property anywhere and especially in an overseas location. This should include independent analysis
including the location, price and yield. Its important to obtain an independent appraisal of the property prior to purchasing to ensure the price is ‘fair value’. There are a number of internet sites that will provide an appraisal also such as Zillow..
Generally SMSF members travel to the USA 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 from an SMSF Advisor before you claim these expenses. As a general rule, a successful SMSF Property purchase will involve a team on the ground.
Trust Deed and Investment Strategy
The SMSF Trust Deed and Investment Strategy must permit the investment in overseas real estate. Redwood Advisory will eEnsure you have an up to date Trust Deed (with borrowing powers) and Investment Strategy with an addendum detailing the US property purchase.
Sole purpose test
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 please ensure you have a qualified property manager to manage the property while you are away. All auditors will look for an external property manager to ensure you meet the ‘sole purpose’ test.
The structure will depend on whether the investment using cash or borrowings. The structure will generally include a Limited Liability Corporation (“LLC”) to be established for EACH property purchase in the relevant jurisdiction i.e. Georgia for an Atlanta property purchase. The LLC will have an Operating Agreement and Articles of Organisation and will be established by a Registered Agent in the USA. A Form SS-4 will be required to apply for an “Employer Identification Number”. It is important to have the correct name for the managing member, which will differ for finance purchases.
Generally a bank account will be opened in the United States. Please seek advice on the name of the bank account and the banking institution to ensure the in-house asset test is satisfied under Superannuation Law. Further, it is important that the bank account is held with an Approved Deposit Taking Institution – if not you may be in breach of the in house asset test.
For purchases using SMSF cash, a Declaration of Trust will most likely be required to be compliant (refer below).
Custody Bare Trust
Certain USA lenders who will provide finance to SMSFs. For purchases using Finance or borrowing, a Custodial Bare Trust is required to be established in Australia. Redwood Advisory is a market leader in providing Bare Trust for SMSF Property at a competitive price.
Do I buy alone or partner with a provider?
An experienced team on the ground with a track record of success is a core element of success with US Property. The investment choice will be important to ensure you are not blinded by the look of a property, without understanding the neighbourhood. There have been a number of horror stories with US SMSF Property purchases where SMSF investors have paid premiums for properties in low socio-demographic areas or “slumlords” – Detroit is a prime example. This results in a high turnover of tenants and may lead to damage to your property, at which time you may be quickly boarding a plane to the USA to inspect the SMSF property. Therefore it is important to ensure your property is insured with a reputable property agent.
Which cities are the best and which area should I avoid?
Firstly, Redwood Advisory does not provide recommendations of SMSF Property. However, as experienced property investors and strong knowledge of the USA Housing market by working with Distressed Property Funds in the USA, we are happy to share factual information on areas or hotspots. Many Redwood clients have purchased in the following cities:
• Atlanta GA
• Memphis TN
• Houston and Dallas TX
• Orlando FL
SMSF Compliance Considerations
Depending on the type of purchase (i.e. cash or borrowing) there are a number of considerations to ensure your fund is Compliant with Superannuation Legislation.
Cash Purchase/ No Borrowing
US regulations will not allow you to purchase a property in the SMSF name. As a result, generally, an LLC is set up with “legal title/ ownership” for the SMSF. A bank account is opened in the USA in the name of the LLC. As a result, this creates a dilemma of how to prove beneficial ownership of the SMSF Property. Further, you will need to ensure you satisfy the ‘in-house assets’ test in relation to the SMSF bank account.
As a result, a “Declaration of Trust” may be required to be established prior to the purchase of the property to establish a relationship between the legal owner (LLC) and the real owner of the property (SMSF). This is per Section 52 (2) (d) of the SIS act. Failure to do so may require the breach to be reported in the Audit Report and in the ATO contravention report. This may also lead to penalties from the ATO directly.
If you have an existing SMSF with no Declaration of Trust, its not too late, CONTACT US for information on how we can ensure your fund is compliant.
SMSF Purchase using Borrowing/ Finance
Similar to Borrowing to Invest in Australian property, a Bare Trust will need to be established to recognise the SMSF as the beneficial owner of the Property. Redwood Advisory can establish the Bare Trust prior to the Sale Contract is signed.
We will need the following details:
• SMSF name
• SMSF Trustee (recommend Corporate Trustee)
• Member Names
• Property Address (including City and State)
• Purchase price
• Loan Amount and loan term
• Lenders details
For more information on our specialist US Property Bare Trust service and smsf buying property overseas contact us today!.
The above is factual information only. 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/ SMSF Investors should seek professional advice prior toinvesting in USA property.