Your self managed super fund (SMSF) can directly invest in commercial or residential property.
This is one of the major advantages of a SMSF that many of our clients have taken advantage of.
Your SMSF can also borrow to purchase property. Types of property allowable are;
- Farms and associated homes (can borrow)
- Residential investment (can borrow)
- Commercial investment (can borrow)
- Vacant land (can’t borrow)
- Under construction (can’t borrow)
- Overseas property
The process of borrowing in your SMSF is a complicated one.
The loan must be a “limited recourse loan”. This means that if you default on the loan, the bank only has recourse to the target property itself and cannot touch your other SMSF assets.
In order for this to happen, the property is purchased by a “custodian” who holds the property in trust for your SMSF until the loan is repaid in full (refer to diagram below)
All rent gets paid to your SMSF and all loan repayments and expenses are paid by your SMSF.
You can contribute commercial property to your fund but not residential property.
You can act as “the bank” and lend money against property that you contribute to your fund.
Currently you can borrow up to the following loan to value ratios (LVRs) for each property class:
LVR’s: Residential 80%
Due to the complexity of these loans, pre-approvals are recommended before you commit to a purchase.
At Loan Initiatives we have assisted many of our clients borrow to buy property in their SMSF. Because we are also Chartered Accountants, we can also advise regarding the complex tax arrangements and strategies available to reduce tax.