Are you thinking about investing in property for your self-managed super fund? The right property investment strategy can offer great options to diversify your super funds portfolio, potentially earning solid returns over the long term. However, purchasing an investment property within your self-managed super fund requires careful planning and consideration. As mortgage brokers, we have helped many clients navigate the process of securing a Limited Recourse Borrowing Arrangement (LRBA) for their SMSF property portfolio.
In this post, we'll share insights and tips on how to successfully obtain an LRBA and purchase an investment property that meets your financial goals. So grab a cup of coffee and let's dive in!
What is a limited recourse borrowing arrangement?
Limited recourse borrowing arrangement (LBRA) is a strategy that allows you to borrow money to invest in a single asset through your self-managed super fund (SMSF). To be eligible for a LBRA, there are certain requirements that you must meet. Here's what you need to know:
- The borrowing must be used to acquire a single acquirable asset.
- The asset must be held on trust for the SMSF, and the SMSF trustee must acquire a beneficial interest in the asset.
- The SMSF trustee must have the right to acquire legal ownership of the asset by making one or more payments.
- The lender's or any other person's rights in case of a default must be limited to the asset acquired with the borrowing.
- The acquirable asset can't be subject to any charge other than that provided in relation to the borrowing.
- The asset can't be replaced with another asset, except under certain specific circumstances.
These requirements ensure that the borrowing arrangement is limited in scope and that the asset acquired is an asset held solely for the benefit of the SMSF. By meeting these requirements, you can take advantage of the benefits of limited recourse borrowing arrangements and invest in property through your SMSF with confidence.
What is a single acquirable asset?
If you're considering investing in property through your SMSF using a limited recourse borrowing arrangement, you need to know what qualifies one asset as a single acquirable asset. Some examples of single acquirable assets are:
- A property on a single title.
- A collection of shares of the same class in a single company that are bought and sold as a single unit. A collection of units that have the same fixed rights in a trust that are bought and sold as a single unit.
- A collection of economically identical commodities, such as gold bars, that are bought and sold as a single unit.
However, it's important to note that assets made up of multiple different assets, such as a strata title apartment with a separate car space on a different title, or farmland on several parcels more than one asset of land on two titles (or different titles), generally won't qualify as a single acquirable asset.
Factors that can determine whether multiple assets can be treated as a single asset include the existence of a building across two or more land titles or other assets, or whether there is a state or territory law that requires the assets to be dealt with together.
Ensure you work with your financial adviser and mortgage broker to ensure any property you’re looking to purchase through your SMSF is in fact suitable. This will ensure you’re making informed decisions about investing through your SMSF using limited recourse borrowing arrangements.
Renovating a property within your SMSF
Let’s look at what you can and cannot do with borrowed funds under the limited recourse borrowing rules. If you're using the borrowed funds to maintain or repair an asset, that's okay. But if you want to improve the asset, you'll need to find another way to finance it. According to the Australian Taxation Office, repairs to permitted asset involve fixing defects, damage or deterioration of the asset without changing its character, while maintenance involves preventing damage or deterioration of the asset to maintain its current state.
Improvements, on the other hand, involve significantly altering the state or function of the asset through substantial alterations or the addition of further substantial features. For maintenance costs for instance, if you need to repair a building's structure damaged by pests, fire, or a storm or repaint it to prevent deterioration, you can use the borrowed funds. However, if you plan to add any new features, such as an additional bedroom or bathroom, you'll need to find another way to finance it as this would generally involve an improvement.
Even though a LRBA cannot be used to improve an asset, the Australian Taxation Office has clarified that you can use money borrowed from other sources, such as your own savings, to make improvements. However, it's crucial to ensure that the improvements made do not fundamentally change the asset's character or create a non-allowable replacement asset.
For example, if you're wanting to borrow money or use the fund's cash reserves to renovate a SMSF residential property, you can do so as long as the renovations don't involve changing its use from, like from a residential property to a commercial property, or converting a single residential property into multiple properties through subdivision. If you're unsure about what types of improvements can be made under a limited recourse borrowing arrangement, it's always best to speak to your financial adviser.
What does it cost to set up a limited recourse borrowing arrangement SMSF loan?
Creating a limited recourse borrowing arrangement can incur more costs than borrowing outside of a super fund ie. a regular owner occupier or investment property home loan. Some costs you’ll want to consider when setting up a limited recourse borrowing arrangement are:
- Obtaining the necessary legal documents to create the trust structure and establish the borrowing arrangements can come at a cost.
- If the fund's trust deed does not allow borrowing or holding an asset on trust, it may need to be amended, which can also add to the cost.
- Some lenders require the fund's trustee structure to change from individual trustees to a corporate trustee, which can involve additional costs.
- There may be loan application fees, and the lender may also arrange for an independent legal review of the loan arrangement.
- Some lenders may require the SMSF trustees to receive independent financial advice, which can also come at a cost.
To help provide a little my guidance, below are some example costs and fees which you could, realistically, expect to pay when applying for an SMSF loan:
Application fee: ~$800
SMSF Review fee: ~$700
Valuation fee: Varies from lender to lender
Establishment fee: ~1.00%
Documentation fee: ~$700
Settlement fee: $600
Ongoing fee (monthly): ~$20
You should also take into account any expenses related to setting up an SMSF, if you do not already have one, and consider additional insurance and estate planning advice if the fund has borrowed money to purchase a significant asset.
Which banks offer SMSF Lending
Getting an LRBA these days can be quite challenging, as many major banks and other financial institutions have stopped offering these products. The process is complex, and the profit margins associated with these loans are usually small. However, there are still some lenders that offer SMSF loans. These lenders include:
- Bank of Queensland (BOQ)
- Firstmac
- Granite Home Loans
- La Trobe Financial
- Liberty Financial
- Mortgage House
- Better Mortgage Managers
There are also a number of private banks which offer SMSF loans to borrowers who meet specific criteria. However, with so many lenders no longer offering LRBA's, it can be overwhelming to know where to start. However, a Settled Home Loans mortgage broker can guide you through the processes and help you get your SMSF loan settled.
Investing in property through a self-managed super fund (SMSF) using a limited recourse borrowing arrangement (LRBA) can offer a great way to diversify your super fund portfolio and earn potential returns over the long term. If you’re looking for better understanding of your options to purchase property through your self managed super fund, give Settled a call on 1300 799 702 or book in a discovery call here to speak with one of our SMSF lending specialists.
