A SMSF loan is a loan that allows you to buy investment property. The returns are then channelled back into your SMSF to increase your retirement savings.

There are some great benefits to purchasing property with your SMSF, some of which are outlined below.

Getting Started

Using your SMSF to borrow funds to purchase property is done with a non-recourse borrowing arrangement.  This means that lender does not have any recourse or right to any of the other assets that are held in the SMSF.

Due to this mandatory restriction, the lender will often ask the members of the SMSF to provide a guarantee.

Purchasing Property

When purchasing a property using a SMSF, the SMSF must provide the deposit to purchase the property and pay all fees that will be incurred. The balance of funds required to purchase the property will be attained via a loan from a lender.

In the event of a default, the lender only has recourse on the property and the guarantees from the members. It cannot claim against any other assets held by the SMSF.

Set up

When using a SMSF for property purchase, it’s typical for the ownership of the property to be held by a separate Trust. This is often known as as “Bare Trust” or “Property Trust” or “Custodian Trust”.

The property is owned by this Trust with the SMSF having a beneficial entitlement to it, and this arrangement remains in place until the loan is fully repaid.

It’s the SMSF that makes the loan repayments and receives the rental income throughout the loan term. It is only once the loan has been repaid in full that the ownership will be transferred to the SMSF.

Before you make a purchase

It’s important to understand how the purchase of a property will be managed by both your SMSF and the Property Trust. Here are some important points to consider before purchasing property.

• Both the SMSF and the Corporate Trustee of the Property Trust must all be established before entering in to a contract to purchase a property.

• The Property Trust and its associated Corporate Trustee are the title holders of the investment property.

• The contract of sale needs to be worded accurately. If not done so, there is the possibility of paying stamp duty twice – first at the purchase of the property and again when the property transfers from the Property Trust to the SMSF.

• You should know and understand the investment strategy for your SMSF. Be clear before you purchase if your investment strategy included property investment.

• Your SMSF must have the power to borrow funds. This means that the SMSF Trust Deed must have included certain clauses to allow it to enter into a borrowing arrangement.

• Your SMSF needs to have sufficient cash flow to service the loan and to pay any fees or expenses arising from the ownership of the property. This can include costs such as building and landlord insurance, property management fees and general maintenance costs.

• Cash flow can come from a variety of sources within the SMSF. This includes the rental income from the investment property, contributions from the members of the fund as well as any investment earnings from other non-property investments within the fund.

• All transactions must follow the “arm’s length” principle. This principle covers a number of conditions including the need for items such as rent to be at market rates. Furthermore, when purchasing a residential property, the SMSF cannot have any dealings with a related party. This means, you cannot sell your own residential property to the SMSF. The residential property owned by the SMSF also cannot be rented to or occupied by a related party. Related party is defined as members of the SMSF or a person related to someone who is a member of the SMSF.

• As with all purchases made by the SMSF, the purchase of an investment property must meet the “Sole Purpose Test” and the Trustee of the SMSF must ensure the fund is compliant at all times.

Why use Planwise Finance for your SMSF Lending?

Our SMSF Lending Specialists are very experienced in all aspects of SMSF Lending and are able to complete the documentation requirements quickly and accurately. This helps to avoid delays that might otherwise be experienced with a non-specialised broker.

Our service extends well beyond that of a standard broker. We have an extensive network to give you the best solution and we work hard to ensure the transaction process will be as smooth as possible.