Borrowing to Purchase Property in Your SMSF
Property investing through your self-managed superannuation fund (SMSF) can be a great way to create wealth for your retirement. By investing in property, you can diversify your super investments. Also, any income from the investment property, including capital gains, will be taxed at concessional rates, so you should end up saving money in the long run.
How does it work?
Review your SMSF trust documentation.
If you already have an SMSF, you’ll need to make sure you have the necessary powers to borrow under your fund.
Set up a separate security trust.
The first step to purchasing an investment property through your SMSF is setting up a separate security trust on behalf of your SMSF. This new security trust will buy and hold the property, and provide a guarantee for your loan.
Loans to SMSFs are “limited recourse loans”. This means that if you default the bank can only access:
- the investment property
- any other property securing the loan
The bank won’t be able to access your other super assets.
When an SMSF uses a Limited Recourse Borrowing Arrangement (LRBA) to purchase an asset, then the arrangement must satisfy the following conditions:
- The SMSF uses the borrowed monies to purchase a single asset or a collection of identical assets that the same market value
- The SMSF can’t use the LRBA monies to improve a purchased asset
- The SMSF trustees receive the beneficial interest in the purchased asset but the legal ownership of the asset is held on trust (the holding trust)
- The SMSF trustees have the right to acquire the legal ownership of the asset by making one or more payments
- Any recourse that the lender has under the LRBA against the SMSF trustees is limited to the single fund asset (including rights to income). Lenders can legally demand an individual to provide a personal guarantee against personal assets
- Replacing the asset subject to the LRBA is possible only in very specific circumstances
Funding your investment
Like regular property investment, you’ll need a deposit from your self-managed super fund, and a loan to cover the difference. You’ll need to take into consideration how much the bank will lend you, and how much your SMSF will need to provide.
When you compare the loans offered by different banks, check interest rates carefully. Some lenders charge their regular home loan rates, while others use higher business loan rates.
The security trust buys and holds the property.
The security trust buys and holds the property in trust for your SMSF.
Rent payments flow through to your SMSF and help pay off the loan. If this rent doesn’t completely cover your loan repayments, the extra needs to come from your SMSF.
You’ll need to consider your cash flow when thinking about this investment type. Again, professional advice is important.
After the loan is paid off
Once your loan is fully repaid, the property can be transferred from the security trust to your SMSF.
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