Buying property with an SMSF loan is growing in popularity.
Property is typically one of the safest and most reliable long-term investments.
So it makes sense to consider steering your retirement investment in this direction.
But there are important differences between buying property the traditional way and using your SMSF.
What is an SMSF?
A self-managed super fund is a private super fund you exclusively manage yourself.
You choose the all the investments and the level of insurance required.
As of June 2022, Australia had 600,000 SMSFs held by more than 1.1 million individuals with a total value of more than $865 billion worth of investments.
That figure amounts to around a quarter of the country’s total superannuation holdings.
It surpasses the total value of public sector and retail funds and rivals the $1081 billion value of industry funds.
SMSFs offer greater control, flexibility and improved tax benefits capped at 15 per cent.
They can have up to six members who are all trustees of the fund.
Their popularity is expected to rise in the coming years.
Buying property with an SMSF
This is a strategy steadily growing in popularity.
Since 2010, SMSF owners have been able to buy an apartment, townhouse, house or even a commercial property with their fund.
To do so, you need to apply for a specific SMSF loan.
SMSF loans differ slightly from traditional home loans.
Your super contributions help pay off the loan, along with the rent on your property.
Any expenses incurred by the property are paid for by your SMSF, leaving you with no further out-of-pocket payments.
Because you are using your superannuation fund, you won’t have access to any rental income or capital gain until you retire or reach preservation age.
However, profits via capital gain may be reinvested.
Applying for an SMSF loan
Lenders generally have stricter conditions before writing loans for SMSFs.
Most require a deposit of at least 20 per cent and in the case of commercial property, this can rise to as high as 30 per cent of the property’s value.
You will also need to demonstrate your ability to make enough regular and sizeable contributions to the fund to service the loan.
Lenders will also closely scrutinise your investment strategy to ensure it meets rigid ATO and ASIC regulations.
Conditions of an SMSF loan
SMSF loans come with a range of strict conditions which must be observed regarding the property.
The property must:
- meet the ‘sole purpose test’ of solely providing retirement benefits for the fund’s members
- not be purchased from a related party of a fund member
- not be lived in by a fund member or any fund members’ related parties
- not be rented by a fund member or any fund members’ related parties
In the case of a commercial property, it may be leased to a fund member for business purposes.
But that lease must be at the market rate and follow specific rules.
Failing to observe these rules can leave the fund members liable to heavy fines and even criminal charges.
Advantages of an SMSF loan
Tax breaks – rental income and capital gains of property are taxed at only 15 per cent, reducing to 10 per cent for capital gains of properties held longer than 12 months.
Your SMSF is also exempt from capital gains when you draw a pension from it. At this time, rental income and capital gains become completely tax free.
Potential for high returns – property has boomed in recent years. Everyone who implemented this strategy five years ago has reaped enormous returns on their investement.
Limited recourse borrowing arrangements – this allows SMSFs to purchase a property with a mere fraction of the funds it has available.
A fund with $400,000 could purchase a property using only around $100,000 for a deposit. The balance of the property would then be funded via a loan with rental income covering repayments.
The property can later be sold with the fund benefiting from the lower capital gains tax of 15 per cent.
Disadvantages of an SMSF loan
Administration costs – SMSF loans tend to attract higher fees, charges and ongoing costs than standard loans.
Cash flow – Your fund must maintain enough cash flow to meet expenses including fees, insurance premiums and other property expenses.
Compliance – There are strict rules surrounding buying property with SMSFs. These require detailed record keeping and financial reporting to the ATO.
Lack of diversification – Unlike traditional super funds, an SMSF invested heavily in property may have a higher concentration of risk and be exposed to greater losses in the event of a property market collapse.
Back-up plan – You will need a plan B in the event of any rental vacancy that leaves shortfalls in the loan repayment.
You will also need to factor in the possibility of the illness, disability or death of the fund member/s.
Inflexibility – You cannot make alterations that change the character of a property bought with an SMSF loan until you have paid off that loan.
SMSF loan documents that are not set up correctly are also difficult to cancel without discharging the loan and bearing substantial losses.
Get advice now
Investing in property is one of the safest and most reliable ways to grow your wealth in the long term.
Using your SMSF to invest in property could have significant benefits but it is not a decision that should be taken lightly.
If you are considering establishing a self-managed super fund or already have one and are interested in using it to invest in property, you must engage the professional support of your accountant, financial adviser along and your finance broker to ensure you get the best possible loan deal.
That’s where Calder Finance Broking can help.
Calder Finance are specialists in the mortgage broking business.
We have formed trusted relationships with multiple bank and non-bank lenders including those who specialise in SMSF loans.
Our connections within the industry always allow us to offer our clients the most attractive rates, tailored to their specific needs.
And to ensure you have the right wealth and investment strategy in place, talk to the team at Calder Wealth Management.
Contact us today to discuss your needs.
The information contained on this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.
Written by David Titley from Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.
