With minimal risks and high return potential, real estate remains one of the best investment options. And if you’re an Australian running a self-managed super fund (SMSF), you might have a strategic way to acquire properties without spending a huge sum of your savings or taking out high-interest mortgage loans. You can do it through SMSF loans. Here’s how to invest in real estate using SMSF loans.
SMSFs and Investment Properties
The goal of SMSFs or superannuation funds, in general, is to fund the retirement of Australians. If you run your own super fund or you have an SMSF, you can use it to invest and grow its value. That way, you can have a financially-secure retirement. If your SMSF has multiple members or trustees, the goal remains the same: it should benefit the members during their retirement. Now, where should your fund invest?
Property is an attractive option. You can purchase rental or investment properties through SMSF loans. Rental income provides your SMSF with stable earnings or returns, making it easier for the fund to repay the loan while growing its value.
However, borrowing money to buy a property through an SMSF is easier said than done. You can achieve it through a limited recourse borrowing arrangement (LRBA). To limit the lender’s recourse, you must establish a separate trust to hold the property on behalf of the SMSF but outside the actual SMSF structure. The income from the investment property will go through the SMSF’s bank account, which will repay the loan. If the SMSF fails to do this, the lender only has the property held in the separate trust for recourse and can’t access other assets owned by the fund.
As such, SMSF loans could mean a higher risk for lenders. So they might ask for a higher interest rate and charge more fees than regular investment loans. The borrowing criteria for SMSF loans can also be stricter than traditional mortgages. This is where SMSF loan experts step in. They will help you navigate the borrowing process and access the most competitive and lowest-interest SMSF loans. With their guidance, you can increase your purchasing power with a strategic loan, acquire the property you desire, and reap the returns through a growing super fund.
Should Your Fund Invest in Residential Property?
While looking to hire an SMSF loan specialist, it’s best to make yourself aware of some rules around borrowing money through SMSF loans. For instance, you (or any other related party) can’t live in or rent a property acquired through an SMSF. Doing so defeats the sole purpose test by the Australian Taxation Office (ATO). Again, the goal of SMSFs is to fund the members’ retirement, so any investment made through these must not provide direct & pre-retirement financial benefits to any member.
Furthermore, you can’t put an existing residential investment property into an SMSF by using the fund to purchase it at market value. Instead, focus on taking out SMSF home loans and acquiring holiday homes or apartment units that you can rent out.
How About Buying Commercial Properties Through SMSF?
It’s best to invest in commercial properties when using SMSF property loans since it complies with LRBAs & ATO rules. You can’t live in such properties, and they can provide stable rental income since their target market includes businesses.
If you own a business, your company can rent your SMSF property and pay rental fees directly to the SMSF. But make sure you get this right. The fees must be at the market rate (no discounts even if your fund owns the property) and must be paid promptly at each due date. That way, it still satisfies the SMSF’s key role, which is to grow its value through investments and provide retirement benefits to the members.
Other Considerations When Taking Out SMSF Loans
Before you make a decision, it’s also crucial to consider the following matters:
- How much can you borrow? Loan-to-value ratios (LVRs) are usually lower for SMSF properties because of LRBAs. Work with a reliable SMSF loan specialist to find a loan product with an LVR that best suits your SMSF investment strategy.
- Where’s the property location? Will the property in such a location make a profit? SMSFs only pay 15% tax on net income, but the property needs to earn a profit so your fund can enjoy those tax savings.
- Have you read the fine print? Make sure to check the loan terms before signing the agreement. For instance, SMSF loans can’t be used to spend on renovations that increase the property’s value. Consult with an SMSF loan expert to ensure your fund remains compliant while taking out a loan.
What Else Should You Do Before Applying for SMSF Loans?
Again, you have to seek financial & legal advice from a professional with years of experience handling SMSF loans. Keep in mind that your SMSF loans and property purchases must comply with ATO’s sole purpose test & LRBA rules & regulations. With an SMSF loan specialist by your side, you can also establish the trust structures required for SMSF loans to comply with the existing superannuation laws in Australia.
With this guide, we hope you go through the process of borrowing money through your SMSF more smoothly. Go and boost your fund & real estate portfolio efficiently!
About the Author:
Jordan Fitch is an Australian specialist in self-managed super funds. I have been working in this industry for 10 years, and I love sharing my knowledge with others who want to learn more about self-managed superannuation.