Property and Borrowing in your Self-Managed Super Fund (SMSF)

One of the biggest advantages of having an SMSF is the ability to directly invest in real estate.

While the ability to borrow in super to purchase property has only been around in the last 15 years or so, self-managed funds could always purchase property in super.

You can purchase both commercial and residential properties in super, and you can even take advantage of government-sponsored property schemes such as the National Rental Affordability Scheme. However, the super fund cannot purchase a residential property that a member owns in their individual name.

 

What are the advantages of having property in my SMSF?

 

1. The tax on any capital gains for an SMSF in the accumulation phase is 15% if sold within a year, and 10% if sold after 12 months. The proceeds are capital gains tax-free if sold in the pension phase. A 0% tax rate is hard to beat.
2. Only 15% tax on earnings in accumulation, and 0% in the pension phase.
3. Property provides diversification from traditional share investments.
4. Appealing to those who are more comfortable using property as an investment rather than shares.

 

However, it is important to take note of the following:

 

1. You cannot live on the property, and neither can any friends or family. (If the property is a commercial property, you may be able to lease it.)
2. Liquidity is significantly reduced. The fund will still need to be able to meet expenses like tax liabilities, strata, and council rates, and this might be an issue if tenants are hard to come by. The lack of liquidity can also present cash flow issues when needing to make a minimum pension payment while in the pension phase.
3. Unless you’re borrowing to purchase the property, you need a higher amount in your super fund to make this a viable investment as real estate requires a higher level of investment compared to shares. Otherwise, you may not have diversified your investments sufficiently.
4. Property has a longer investment cycle – generally more suitable for those who are willing to be in the property market for at least 10 years.

 

Borrowing

 

Your SMSF may be eligible to borrow and purchase a residential or commercial investment property under a Limited Recourse Borrowing Arrangement.

If you are considering borrowing in super, you should be aware of the following issues:

 

1. Make sure that the property purchased fits with the investment strategy of your fund.
2. The paperwork and costs associated with setting up the required structure and the loan costs associated with borrowing can still present a barrier to some SMSF investors with smaller super balances.
3. Negative gearing isn’t as advantageous in super as it is outside of super. Since the tax rate is only 15% in the accumulation phase, the value of the deduction is significantly lower in super when compared to individual marginal tax rates.
4. You cannot use borrowed funds to improve the property, only to repair and maintain it.
5. Even if you have extra cash in your SMSF to improve the property, you cannot fundamentally change the nature or purpose of the property (there are limited exceptions given to off-the-plan properties).

 

Need help? You can engage a Mortgage Broker for their expertise.

 

Using a Mortgage Broker for your SMSF Loan

 

Your mortgage broker is uniquely positioned to help you navigate your way to the best loan option for your fund.

The major banks exited the SMSF loan market in 2018 as regulatory requirements became too onerous. Since then a large number of non-bank lenders and a very small number of minor banks have continued (or started) to offer SMSF loans.

Your mortgage broker knows which of these lenders to turn to, based on the financial position, security property, and investment goals of your SMSF. This entails determining which lenders best meet your situation, which lender will act quickly to approve your finances, and which lenders offer the lowest cost solution.

To assess your purchase, at a basic level, we need to understand the assets and income of your super fund, the purchase price, the address and income of your chosen investment property, and how you would like to structure your loan.

 

What if you already have a loan in your SMSF?

 

It used to be that it was costly and time-consuming to refinance an SMSF loan, but as more and more lenders have entered the market, many of them have adopted an easy refinance solution.

This is really important and helpful if you are stuck in an SMSF loan with a bank that is constantly increasing the interest rate on your SMSF loan.

Our simple refinance process requires that as long as your new loan results in a lower interest rate and repayment than your current loan, and as long as your rental income is greater than your loan repayments, you will qualify for a simple refinance. This makes refinancing faster, much more cost-effective, and hassle-free.

Note that the fast refinance process is still reliant on your loan-to-valuation ratio and the nature of your security property being acceptable.

So, if you are thinking about purchasing a property using an SMSF, or want a better rate and repayment for your current SMSF loan, your Nava Financial broker has you covered.

 

How can a mortgage broker help your fund purchase property? Let’s explore some case studies.

 

Case Study 1

Susan is a PAYG employee of a not-for-profit organization. After time spent out of the workforce, her superannuation balance was quite low. Wanting to boost her super before retirement, Sam opted to purchase a small commercial office space.

As the office was spread over two titles, we arranged two separate SMSF loans, with debts based on Susan’s borrowing capacity. Susan will be able to salary sacrifice more funds to super, helping reduce debt so that she can be debt-free in retirement, and generating a debt-free rental income from the offices in retirement.

 

Case Study 2

Louise and Aaron were PAYG executives, seeking to buy a going concern business, which was sold with premises. It was important to them to secure the premises as well as the business, however, there was not enough equity in their home to do both.

We assisted with financing the business purchase secured by their home and helped them secure the business premises using their Super Fund. Being a specialized business premise (child care centre), we used a 60% gearing strategy with an initial interest-only term to allow the new business purchase to settle and cashflow patterns to be established.

 

Case Study 3

Melissa, Kelly, and Emily are sisters who have each contributed to and are members of, their family SMSF. Melissa is self-employed, with Kelly and Emily both working for Melissa.

Wanting to invest their super into residential property, the sisters first purchased a residential townhouse in a major regional centre for $360,000. The sisters borrowed $288,000 to maximize the cash retained in their super fund, as they wanted to invest again.

Eighteen months later, the sisters located a residential unit in Surfers Paradise for $465,000. Using their retained cash in the super fund they were able to put down a further 20% deposit to secure the purchase. The sisters borrowed 75% of the purchase price.

By buying lower-cost assets with good rental returns, the sisters have been able to retain cash in their SMSF to maintain a deposit for future investments.

 

If you would like to know more about property and borrowing through your SMSF, click here to watch our latest webinar focusing on borrowing to purchase property through your SMSF.

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