An introduction to the Self-Managed Superannuation Fund (SMSF)!
Putting you in charge of your superannuation destiny, a Self-Managed Superannuation Fund might be a great way for you to get into the property market. However, it’s important to do your homework - there are strict rules and regulations, and various hidden complexities!
In this blog, we’re going to unpack some of the essential bits of info about what a SMSF is - and how these funds can be used to buy property.
What is a Self-Managed Superannuation Fund (SMSF)?
As its title suggests, a SMSF is a way to manage your own superannuation - giving you (or your company) control over your superannuation investments.
As with other funds, employer contributions - along with any other additional contributions you want - are paid to it.
Furthermore, members of these super funds are (potentially) able to use them to make investments in property - provided they adhere to strict guidelines.
NB, whether this is the best way forward depends a lot on your personal circumstances. At OzBroker, we can give you the informed, expert advice that will help you determine if a SMSF is for you.
Can you use it to make a property investment?
Yep. A house, apartment or townhouse.
There are just a couple of important rules: first, you (or your family) cannot actually be living on the property. Second, you are not allowed to build on, or renovate it, in any way (although, you can do what’s necessary to maintain it!).
Commercial properties are valid too. It’s relatively common for small business owners to purchase commercial premises using a SMSF - and pay rent directly to it.
In fact, these investments come with a few benefits. For example, commercial properties can be leased to SMSF trustees or associated individuals and businesses. Members can also sell them to their SMSF.
Trustees of the fund must ensure that the property investment satisfies the SMSF requirement of providing retirement benefits for the members. This will take into account yield and projections in property value.
Can my SMSF buy a property from my personal portfolio?
No, you can’t use your fund to buy a residential property owned by you or a related party.
But, yes, you can use it to buy commercial property you already own!
To avoid any uncertainties - and to avoid the chance of any penalties - it might be a good idea to get legal consultation with a trusted lawyer, to make sure you’re doing the right thing.
Can you get a loan for a super fund?
Short answer: yes. However, it’s also true that few lenders will give loans to super funds. Basically, they are a relatively “risky” prospect for banks. This is because of the small market size along with the limit to the lender’s recourse.
But don’t worry, OzBroker can help you find the lenders out there - with the best offers - that do provide these kind of loans!
Here are essential terms and conditions of the game:
- The property asset has to be something the SMSF could otherwise legally acquire (if it had the funds). Furthermore, only a single asset is allowed in the borrowing agreement.
- Should there be a loan default, the lender has limited recourse: they can only claim one particular asset, no others of the fund.
- A security custodian must be in place to hold the asset in trust.
- From the beginning, the SMSF acquires a beneficial interest in the asset.
- If all loan repayments are made, the SMSF can acquire legal title from the security trustee/custodian.
How will the loan be structured?
The loan is made out to the SMSF as a trustee - with the security custodian defined as the mortgagor.
In this arrangement - as we’ve mentioned - the lender has limited recourse. In this case, should you hit unexpected difficulties and be unable to make repayments, your lender only has access to the assets that the loan is against.
Guarantees are sometimes required from the superannuation fund. However, if there’s a default under these conditions, the guarantor does not have recourse to the super trustee.
There are some instances where a personal guarantee isn’t necessary. The conditions vary, but sometimes this can occur if you’re borrowing under 60% of the property, if you can provide a large deposit and/or if you have a high net worth/SMSF balance.
When should I apply for an SMSF loan?
Okay, so yes, it can be a complicated process. Give yourself plenty of time to get all the materials and documents together - and then expect at least a week while the banks assess your credentials.
To get approval for the loan, you’ll have to have found the property you’d like to purchase. That is, in most cases, you’ll need at least a property address and all trust deeds to be assessed by the lender.
How do I apply for an SMSF loan?
To be honest, there are few bank managers that understand Self-Managed Super Funds (SMSF), and even fewer who are experts in lending to them.
It’s a potentially complicated process - we recommend you consult with the expertise of an experienced broker. And, yes, that means someone like us - you can book in for a free consultation here!
We’ll also unpack a little more about how to go about the process of applying and securing a loan in a follow-up blog!