Questions I should ask before using my SMSF to buy real estate
Promoted by Blue Crane Capital
Thinking of buying property with your SMSF? Here are some questions you should ask your trusted advisers before making the first move.
Investing in real estate using your SMSF can seem more trouble than it’s worth with steep fines and penalties for non-compliance and, or poor structuring. But for the right scenarios, they can be highly advantageous.
At Blue Crane Capital, we have helped a range of clients to harness this wealth creation vehicle. Here are some of the common questions we’ve come across in helping clients find the sharpest rates for their needs.
Please ensure you seek well informed legal and accounting/financial advice in conjunction with a qualified finance broker (who specialises in SMSF) early on in the process.
How many members can be in an SMSF?
Recent changes to the Superannuation Industry (Supervision) Act (SIS Act) means that up to six members can be part of a SMSF.
How can this benefit me?
If you have more than two children, you and your partner could join forces with them to set up an SMSF and purchase an investment property. Or you can create an SMSF with your business partners to purchase your business premises to lease back to your business. The increase in SMSF members means that there are more scenarios and possibilities to make SMSFs work for you and to create asset wealth.
With more members in your SMSF, running costs are shared among members and therefore reduced per person.
How much can I borrow using my SMSF?
We are seeing lenders offering up to 80% leverage (80% lending against the purchase price or valuation) on both residential and commercial properties – subject to full assessment.
What is the minimum balance I should have, to set up an SMSF?
Typically we believe there should have to be a minimum of $250,000 (cash reserves or liquid assets) before you think about setting up an SMSF. This is due to the LVR requirements, servicing metrics and the upfront costs.
There are also ongoing costs associated with having an SMSF such as the annual supervisory levy to the ATO, independent audits and other costs such as insurance and financial advisers.
If you take out an SMSF loan, repayments come out of your SMSF meaning you need to have sufficient funds and contributions to cover repayments and any other fees.
Who are the main lenders in the SMSF space?
Not every lender offers SMSF loans, in fact, many lenders had exited the market a few years ago due to potential risks to lenders. With the latest change to the SIS Act and the rising popularity of properties owned in SMSF trusts, many lenders are joining the space and offering competitive rates.
This is where it’s important to consult your broker and your other trusted advisers. Make sure your broker works with all lenders – banks, non-banks and private lenders – to find the best product for your needs.
Is it worth refinancing an SMSF loan?
With more lenders coming back into the SMSF lending space and the increasing popularity of using your SMSF to purchase real estate, it may be worthwhile looking into refinancing your existing loans.
You can only refinance $ for $ loan amount, meaning you cannot refinance and increase your new loan.
Talk to your broker about your current rate, product and repayment structure.
What information do I need to prepare for an SMSF loan to purchase a property?
This will differ from lender to lender but generally you will need the following documents:
- Certified copy of the SMSF Trust Deed
- Certified copy of Custodian Trust Deed
- Financial information to ensure serviceability
- Full copy of Contract of Sale
- Members - Assets & Liabilities
- Forecasted market rental on the new property (this must be arms-length tenancy)
If I default on my loan, can the other assets in my SMSF be used to cover the loan?
An SMSF loan is considered a limited recourse borrowing arrangement (LRBA). If you’re unable to repay your loan, the lender is limited to the asset secured against the loan.
SMSF loan interest rates seem to be higher than regular home loans. Why is this?
Because SMSF Loans are an LRBA, they’re considered a higher risk product. This means that some lenders will add a premium to the interest. However, lenders are increasingly playing competitively so you can still find a viable loan for you.
If you’re worried about higher interest rates, head to SMSFr8 and find out what your rate could be. SMSFr8 provides instant, free rate estimates if you’re looking to purchase residential or commercial real estate with your SMSF.
Can I live in the house I purchase with my SMSF? Can I work in the commercial building I purchase?
If you want to invest in real estate using your SMSF, it needs to pass the ‘sole purpose test’ of only providing retirement benefits to the fund members. It cannot be lived in or rented by any of the fund members, or parties related to the fund members.
However, you can purchase your business premises and rent it back to your business.
For both residential and commercial properties held within SMSF trusts, there are strict guidelines around renovations and repairs. Make sure you’re across the requirements before you carry out any work on your property.
Who should I talk to before taking out an SMSF loan?
Make sure you consult your accountant and financial adviser before you take out an SMSF loan. Your trusted advisers are best placed to advise you on the best options for your scenario. The complexity of SMSF lending, strict guidelines and steep fines means that you need professional advice and assistance to set it up properly.
Interested in SMSF loans but don’t know where to start?
Get the ball rolling with SMSFr8 and find out the sharpest interest rate you could get for a residential or commercial property using your SMSF. Powered by Blue Crane Capital, SMSFr8 compares rates across the entire lender market – banks, non-banks and private lenders – to bring you an estimate on what your rate could be.
Blue Crane Capital can also help you work out if an SMSF loan is the right product for you. Get in touch with the Blue Crane team to have a confidential, obligation-free chat about your finance needs.