Leveraging SMSFs for Property Investment Success

Buying property through a self-managed super fund (SMSF) has gained popularity recently, particularly because SMSFs can now borrow money to invest in property. However, strict rules govern how SMSFs can buy and manage properties, so it’s essential to understand what’s involved. Here’s a straightforward guide to help you with some of the basics.

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Investing in Residential Property

When it comes to residential property, SMSFs have clear restrictions. These rules aim to ensure that the property is a retirement investment and not for personal use. The key points to remember here are -

• No personal or family use: You, other trustees, and anyone related to the trustees (even distant relations) cannot live in or rent the property.
• No holiday homes: Buying a holiday property and using it during vacation is prohibited, even if it’s left vacant for the rest of the year.
• No transfers of existing properties: You cannot sell or contribute a residential property you already own to your SMSF, even at market value or within superannuation cap limits.

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Investing in Commercial Property

Commercial property is often more flexible and beneficial for SMSF trustees, particularly for small business owners. Here’s what you need to understand -?

• Leasing to related parties: Unlike residential properties, commercial properties can be leased to trustees or related parties, provided the lease terms follow market rates.
• Ideal for small businesses: Many small business owners use their SMSF to buy their business premises and pay rent directly to their fund. This can be a strategic way to build retirement savings.
• Compliance is key: Any lease arrangement must be formal, with rent paid on time and clearly documented. The SMSF must also meet the “sole purpose test,” ensuring the investment benefits members’ retirement.

Borrowing to Buy Property in Your SMSF

SMSFs can borrow to buy property through a limited recourse borrowing arrangement (LRBA). This type of loan structure has unique requirements that differ from traditional home loans.

• Special loan structures: Borrowing involves setting up a separate trust to hold the property. This ensures the lender can only claim the property itself and not other SMSF assets if the loan defaults.
• Stricter lending criteria: SMSF loans typically have tighter restrictions, such as lower loan-to-value ratios and higher fees. It’s crucial to evaluate whether the property investment is financially viable under these conditions.
• Seek professional advice: Many banks don’t offer SMSF loans, so working with a mortgage broker experienced in SMSF financing is highly recommended. They can help identify suitable lenders and guide you through the borrowing process.

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Key Considerations

• Ensure your SMSF always has enough funds to cover loan repayments, which must come from the fund’s bank account. Rental income and super contributions are often used for this purpose.
• Evaluate the property’s potential rental yield and long-term growth before making a purchase.
• Always seek advice from professionals, including a mortgage broker and legal or financial advisors, to ensure your investment complies with SMSF rules and aligns with your retirement goals.

Need more guidance with SMSF? Contact us with your questions, we’re here to help. Book an appointment with us here.??

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