Using your Self Managed Super Fund (SMSF) to purchase property investments.
The SMSF can invest in either commercial or residential property, but it can’t be your place of residence. You can’t have any dealings with a related party when investing in residential property. You can’t live in it, use the property as a holiday house or have a family member live in it. It's sole purpose is an investment of your SMSF.
Apart from always seeking advise from a Professional Accountant and Financial Planner, here are some important points regarding the use of a SMSF for property investment:
1. To invest in property, it is important to set up the SMSF first, including the structure above.
2. A SMSF itself can’t borrow money, and therefore a Bare Trust structure is put in place to facilitate the loans.
3. The only purpose of the Bare Trust (also referred to as a Property Trust) is to keep title over the investment property until the loan is paid off.
4. All property related costs can be paid by the SMSF.
5. The SMSF can receive rental income and pay for all operating expenses and loan repayments.
6. Only one property can be added into a structure like this.
7. The property will revert back to the SMSF when the loan is repaid.
8. Funds can be borrowed from the Trustees or the bank, or a combination of yourself and the bank.
9. The loan type a bank would give the SMSF is a limited recourse loan, meaning the bank does not have a recourse on the SMSF should the loan default.
10. For this reason banks usually ask for a personal guarantee over the property from Trustees.
11. The maximum Loan to Valuation Ratios (LVR) is usually around 80% with residential property and 70% with commercial property when members guarantee the loans.
12. When there’s a bank loan and a 60% LVR, the bank might not require guarantees from Trustees.
13. The lender to the SMSF can be the Trustees as well, so you don’t have to use a bank.
14. Trustees can borrow from the bank and then on-lend to the SMSF – this option might make the administration easier.
15. The Bare Trust and Corporate Trustee are merely legal entities for holding the property and all transactions take place in the SMSF.
16. An SMSF cannot normally incur any loans. To purchase a property, a SMSF can use a Limited Recourse Borrowing Arrangement. This is where the Trustees would provide a guarantee to the bank for the loan. Trustees can use a mortgage broker to help them find the best suitable loan for their circumstances from a panel of lenders.
How can AVG Valuers assist you?
1. AVG Valuers can assist by conducting the initial/Pre-Purchase Valuation for your SMSF, so it complies with the super rules.
2. By conducting regular Superfund Audit Valuations that are required every 2 years.
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