Self-managed super funds (SMSFs) enable individuals to assume direct responsibility of their retirement investment. Buying property has been one of the most used plans in an SMSF. Several trustees seek SMSF Loans for Property or SMSF Commercial Loans as an opportunity to increase their investment. These loans are based on the particular regulations that regulating bodies and lenders have established and therefore it is important to know how SMSF Loans works before getting into property-oriented investments.
What Are SMSF Loans for Property?
An SMSF can borrow funds to acquire residential or commercial property under SMSF Loans for Property, which are a long-term investment strategy by the SMSF. The house is then transferred into a fund asset, under rigid rules of compliance. Although SMSFs are flexible and are controlled, there are clear structures associated with the process of the loan so that the fund is not disrupted and cannot be in breach of the regulatory standards.
An SMSF usually undertakes borrowing under a limited recourse borrowing arrangement (LRBA). This implies that the lender is not at liberty to reclaim any other assets that the fund may be holding but the property that is held under the loan in case of default of the SMSF. This type of structure safeguards the larger retirement savings of the SMSF.
The reasoning of SMSF Trustees Explore property investments
Property is also viewed by many trustees as a good investment as it has tangible long-term returns in the form of rental income and any potential capital growth. Investment in residential or commercial real estate, SMSF Loans assist the fund in enlarging its investments and repayment is distributed over a duration of time.
Typical reasons why one may decide to use SMSF property loans are:
- A systematic road to invest in growth assets.
- Flexibility in investments of funds.
- The rental income was included in the cash flow of the SMSF.
- Potential of long-term appreciation.
- Buying opportunities for commercial property that is employed by a business entity.
Although these are some of the factors that may have an impact on the decisions made by trustees, every SMSF is supposed to be in tandem with the lending policies and investment policies.
Knowing SMSF Commercial Loans
SMSF Commercial Loans are used when the fund wishes to buy a commercial property like an office, warehouse, retail unit or an industrial property. A large number of SMSF trustees with businesses of their own look at commercial purchases since the property can be leased back to a related party on market based terms.
The commercial property that is bought using an SMSF has certain strict rules, such as:
- The lease contracts should be on an arms length basis.
- Rent should be pegged on market value.
- Lease payments should be made at the right time.
- The use of properties has to be in accordance with SMSFs
Such guidelines make it equitable and safeguards the fund against poorly mounted non-business schemes.
How the Borrowing Structure Works
SMSF borrowing is not the same as conventional home loans. The SMSF Loans fpr Property are done in the framework of LRBA, the property is placed in a separate bare trust until the loan is repaid.
Key components include:
- SMSF Trustee- Runs the fund and leads to decisions.
- Bare Trust/Custodian Trustee- The title of the property is held by the SMSF in a loan term.
- Lender- Facilitates the SMSF loan as per LRBA.
- Property Investment- Rental income on SMSF.
This is a multi-step structure that guarantees compliance and gives the SMSF some protection against risks not only to the property itself.
Documentation Requirements and Eligibility
The credit checks by lenders of SMSF Loans usually include:
- The financial status of the SMSF.
- Contribution history
- Current portfolio of investments.
- Cash flow and liquidity
- Compliance records
- Superannuation policy involving borrowing.
Documentation can consist of trust deeds, SMSF financial statements, investment strategies, identification documents and information regarding the selected property.
Every lender applies its own standards and therefore, the SMSF is expected to make up good records to facilitate the borrowing process.
SMSF Loans in Property: What Trustees ought to take into account
Trustees are advised to consider things like: before they apply to SMSF Loans for Property.
- Long-term affordability
- Cash flow from rental income
- Adherence to laws on superannuation.
- Loan characteristics and interest rates.
- Responsibilities of insurance and maintenance.
- Further deposits to the SMSF.
These factors enable the trustees to determine whether it is appropriate to borrow or not based on the investment strategy and objective of the fund at retirement.
The difference between SMSF Commercial Loans and the usual SMSF Property Loans
Although the two types of loans have the same rules of borrowing, SMSF Commercial Loans is different in a number of ways:
1. Rental Income Potential
Commercial properties can turn out to give higher rental income than the residential property.
2. Lease Structure
The terms and conditions of commercial leases are lengthier and more formal.
3. Business Use
The SMSF is permitted to lease the property to a related business on a commercial basis which generates a structured stream of income.
4. Valuation and Documentation.
Business evaluation can be accompanied by extra surveys because of the property characteristics.
Knowledge of such differences aids the trustees in planning its investment strategies depending on the funds objective.
Advantages of SMSF Loans for Property
Some of the benefits that borrowers who intended to borrow through SMSF Loans for Property include:
- Super investments are under direct control.
- Capacity to pay loans using rental revenue.
- Tax benefits that can be earned based on the structure of funds.
- SMSF assets diversification.
- Planned long term investment.
Although the benefits differ according to each fund, the greatest advantage is that it will have a better roadmap of the property-based super investments.
Final Thoughts
Whether an SMSF is considering using SMSF Loans for Property as an investment of residential property or to check SMSF Commercial Loans to use as a business, it will be satisfied to know how to plan with SMSF Loans. The SMSF borrowing must be compliant, well planned and a well defined investment strategy should be in place with regards to the long term retirement objectives. Preparation of documents, checking of eligibility and comprehension of loan requirements allows trustees to do property-related SMSF borrowing with increased confidence.
