Sep 27, 2022 | Education, SMSF loan
Self-managed super funds (SMSFs) make up approximately 30% of superannuation assets in Australia, and this number is expected to increase.
Buying property in a super fund is a popular option and Dash Money can help SMSF borrowers looking to diversify their existing SMSF portfolio by investing in property.
SMSF lending basics
SMSF loans can help customers buy residential and commercial property, much the same way a traditional investment loan works.
Like an investment loan, SMSF loans require a deposit, which will vary by lender. An example of this is the Dash Investor loan, which lends up to 70% of the residential investment property value.
At a minimum, the SMSF needs funds to cover the deposit as well as any associated costs. The lender will also consider any proposed rental income and review payslips or tax returns to ensure the SMSF can meet future loan repayment.
What is a self-managed super fund loan?
SMSF loans support SMSF trustees to borrow money to buy an investment property they may not be able to afford to buy through their SMSF outright.
After the purchase, ownership of the property is held in a custodian trust until the loan is repaid. At that point, the SMSF acquires the title. Throughout the life of the loan, SMSF members have a beneficial interest in the property. Any income generated is reinvested into the SMSF to help repay the loan or increase the value of the fund.
While SMSF loans can be used to buy either commercial property or residential property, it must pass the tax office’s sole purpose test. This means the trustee must be able to prove that the sole purpose of buying the property is to provide retirement income.
How does it work?
As part of your application, you will need to supply copies of the SMSF trust deed, the custodian trust deed and the contract of sale.
You will also need to show proof of adequate personal income and you may need to compile SMSF bank statements, tax returns, audit certifications and rental estimates. This information helps the lender to ensure that everything is in order and that you can afford to make the necessary loan repayment.
What are the SMSF loan risks or downsides?
SMSFs will remain an important part of the superannuation mix. However, while there are benefits to buying property through your SMSF, there are also some risks.
Anyone considering creating a SMSF to purchase property should seek the advice of a qualified financial adviser.
Under limited recourse property loans, a lender cannot recoup losses from any other assets held in the SMSF. They can only make a claim against the property, which is held in a custodian trust.
While this provides borrowers with some level of protection, it is important to do your research before diving in. A licensed financial adviser can help you to ensure you understand your obligations and assess whether an SMSF loan aligns with your long-term investment strategy.
Benefits to diversifying
Buying an investment property through your SMSF means your superannuation fund is working for you in a different way to having it invested in an industry fund, or in shares, for example.
Many investors like residential and commercial property because they are more tangible than other investments.
How to get started?
If you are looking to add to your portfolio and want to purchase property through your SMSF, reach out to a Dash Money Lending Specialist today.
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