SMSF investors remain a key area for new property development for builders as inquiries by homebuyers decrease due to rising interest rates, according to a property firm that has developed a way for SMSFs to deal directly with small and large builders.
One Contract Property managing director Raymond Hempstead said builders had been focusing on mum and dad investors outside of super, but the increase in interest rates had heavily reduced their capacity to borrow.
“What has not been hit hard are the individuals still looking to invest and use their SMSF because they have a separate borrowing capacity within their fund and 10.5 per cent of their wage coming in once a quarter,” Hempstead told smstrusteenews.
“If interest rates move a little bit more, that is not going to affect their day-to-day lifestyle and so there are more builders coming to us and saying we need to have a chat.”
He said interest in SMSF investors from builders has been historically hard to deal with as these funds cannot engage in two-contract property development using debt and builders were reluctant to engage in property work with SMSFs, which placed high financial risks on them.
However, he revealed Self Managed Superannuation Funds Ruling 2012/1 allows firms like One Contract to act as an intermediate party, which creates a single contract for the builder and temporarily owns and develops a property for an SMSF.
“We have a 65/35 arrangement where the SMSF pays a 35 per cent deposit, which is released to us to assist in purchasing land, and we provide funding for the remaining 65 per cent, which shifts the risk from the builder across to us and the SMSF,” he said.
According to Hempstead the arrangement also allowed SMSF investors to choose the location, type of property and builder they preferred rather than being locked into property development packages that may not suit them.
“The investor chooses, but we buy and settle on the block of land, engage and pay the builder and are contracted with them as if they’re building for any investor, but we mirror those terms and conditions into a single-part contract with the SMSF and at completion the fund pays the 65 per cent balance and the title gets transferred into the fund,” he explained.
He pointed out the model opened up options for SMSF investors outside what has been available to them to date in terms of property choices as well as being limited to where a builder may be operating.
“Most of our work is business to business and we are dealing with builders who until now have not been able to talk to SMSF trustees because they were unable to get consistent supply of stock or, from the builders’ point of view, have not been able to sell to them because they haven’t been able to provide a single-part contract consistently,” he noted.
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