Home Finance Borrow To Buy Property Using Your SMSF: Step-By-Step Guide

Borrow To Buy Property Using Your SMSF: Step-By-Step Guide

It is known that you cannot borrow money from your self-managed super fund, but the “no borrowing” has some exceptions just as any other SMSF rule. Before any consideration, SMSF trustees must know the difference between direct and indirect borrowing, and the special rules that apply to the no borrowing rule. Indeed your super fund cannot directly borrow money, but there are two exceptions: for paying a member’s (trustee’s) benefit or for urgent settling of a share transaction.

SMSF Loans

The latest changes to superannuation legislation have made borrowing money for property investments possible. Now, you can borrow money from your self-managed superannuation fund to pay for any type of property, including commercial, industrial, residential or even for a farm (under certain circumstances). If your SMSF has enough money that can be put down a deposit, the remaining amount of the purchase price can be borrowed. The SMSF loan can be either provided by the members of your fund or loaned from a financial institution.

The SMSF loan is set up with a non-recourse borrowing arrangement. In other words, you, the lender, are not allowed to recourse any other asset in the SMSF without the trustees giving you a guarantee. However, you should know that with the SMSF you can only partially pay for the property and all included fees. If you need to pay a larger deposit on an investment property, the investment bank might give up the requirements for trustees’ guarantee. In that case, the property will be the only security for the loan that matters, under the so-called limited recourse loan arrangement.

There are many benefits of the SMSF loan for purchasing a property. The greatest one is that you can sell your commercial property by the SMSF at market rates. Another benefit is that the assets of your SMSF are secure, since you are the only one with the right of recourse on the investment property. Using the rental income and super contributions, the loan is repaid conveniently. Also, the SMSF is only taxed at the net income, since the expenses and loan interested are deducted.

Before you loan money from your SMSF for an investment property, make sure your trust deed allows borrowing. Then, you should create an investment strategy of your super fund and include provision for your investment property. To service the loan, your SMSF must have some cash flows, which are usually achieved from trustees’ contributions, rental incomes and investment earnings.

The owners of investment property are you and your fund members, with your SMSF entitled to be the beneficiary. The bare trust is known as the title holder until the SMSF loan is paid off. After the SMSF loan is repaid, your SMSF has every right (not obligatory) to acquire the legal ownership of the investment property.