If you're thinking about investing in commercial property using your Self-Managed Super Fund (SMSF), you're not alone. SMSF loans for commercial property are becoming increasingly popular because they offer a range of benefits and tax incentives that traditional loans don't.
In this guide, we'll explain everything you need to know about SMSF commercial property loans, including their benefits and how they differ from the tradition of purchasing residential property loans. So, let's get started!
Explanation of SMSF Commercial Property Loan
Loans for purchasing commercial property within your SMSF allow for commercial property investment in warehouses, offices, factories, or other types of real estate that are used for business purposes.
By using a SMSF commercial property loan, your SMSF can borrow money to invest in a commercial property, while benefiting from tax incentives and the potential for investment growth.
These mortgages have different features and requirements then traditional residential property mortgages, and it's important to have a thorough understanding of the lending framework before applying.
Benefits of borrowing through your SMSF
Importance of having the right lending strategy for your property investment plans
If you're planning to invest in property, having a strong lending strategy is essential. It can help you maximise tax benefits, lower risks and achieve better investment growth. This is particularly important if you're considering investing through a SMSF, as there are specific regulations you need to follow when borrowing money to invest in commercial property.
By working with a lender who specialises in SMSF commercial loans, you can create a lending strategy that aligns with your investment objectives and ensures you comply with the regulations. With the right strategy in place, you can unlock the full potential of your SMSF and achieve your financial goals.
Tax incentives
If you're considering investing in commercial property, financing your investment with an SMSF loan comes with many tax benefits.
One significant advantage is that the rental income earned from your SMSF-owned property is taxed at a concessional rate of just 15%, which can help you to maximise your investment return and grow your wealth over time. Also, if you hold the property for over a year and then sell it, the capital gains tax rate is reduced by one-third.
However, there are complex tax regulations to navigate, so it's important to work with a trusted adviser who can help you take full advantage of all the available benefits.
Investment growth
If you're looking for a long-term investment opportunity in Australia, commercial property may be a great option. Compared to residential property, when you buy commercial property it can offer a more stable and consistent return, with higher rental yields and less tenant turnover.
There's also potential for capital growth in areas where there is a high demand for commercial space, as businesses expand and look for larger offices.
Overall, investing in commercial property through your SMSF can provide a solid foundation for your investment growth.
Understanding SMSF Commercial Loans
Differences between commercial and residential property loans
It's important to know that there are two main types of SMSF loans: commercial and residential. The main difference between them is the purpose of the property being purchased.
Commercial loans are used for investment properties, like office buildings or warehouses, that generate cash flow, while residential loans are for personal use, like buying a home. Commercial loans are generally riskier for lenders, so they tend to have higher interest rates and shorter repayment terms.
Residential loans have lower interest rates, longer repayment terms, and are considered less risky. Understanding these differences is crucial when evaluating options across all SMSF loans and which is the right type of loan for your investment strategy.
Loan-to-Value Ratio’s (LVR) compared to residential loans
LVR, or loan-to-value ratio, is an important factor to consider when applying for a SMSF loan. For commercial mortgages, the LVR is typically lower compared to residential mortgages. This means that you may need to have a larger deposit or equity in the property in order to qualify for a commercial loan.
The reason for this is that commercial real-estate are generally considered to be riskier investments, and lenders want to mitigate their risk by requiring a larger upfront investment from the borrower. It's important to keep in mind that each lender has their own LVR requirements, so it's worth shopping around to find a lender that offers terms that work for your investment goals.
Features and benefits of commercial property loans
Commercial property loans offer several features and benefits that make them an attractive investment option. These loans typically have longer loan terms and lower interest rates compared to traditional residential loans. Additionally, they offer a higher loan amount, which allows investors to purchase commercial property larger than usual or buy multiple properties.
The rental yield on commercial properties is also typically higher than residential properties, which can provide a steady stream of income for the investor. Also, commercial property mortgages offer flexibility in repayment terms, allowing borrowers to make interest-only payments or structured repayments.
Another advantage of commercial property loans is that they can be obtained through an self-managed superannuation fund, providing additional tax benefits to the investor.
Interest rates and fees
Interest rates for commercial property mortgages in Australia depend on various factors, such as the lender, borrower's financial history, loan amount, and loan term. These rates can either be fixed or variable and may differ significantly among different lenders.
Some lenders offer promotional interest rates that can be lower than standard rates and other incentives, such as reduced establishment fee, cash-back offers, or flexible repayment options.
However, borrowers should also take into account other charges, including ongoing fees, exit fees, and establishment fees, to make a well-informed decision.
Who should consider buying commercial property through their SMSF?
If you're a business owner or medical professional who runs their own clinic, buying a commercial property through your SMSF can be a great investment strategy which can provide some great advantages! Let me break it down for you:
You're a Business Owner
Business owners or self employed borrowers, can benefit greatly from using SMSFs because of their flexibility. With an SMSF, a business owner can purchase their business property under their SMSF name, and rent the space out to their business.
The business pays rent to the SMSF, which can be claimed as a business expense. The SMSF then uses this rent to pay off the loan, while also receiving rental income.
This is a great way for business owners to use their SMSF to purchase property while also benefiting their business.
If you’re a Medical or Health Professional
Often when multiple medical professionals work together in a practice, each one will likely have a considerable amount in their super. This gives them the flexibility to diversify their super assets into commercial property.
Here's an example of how this works:
Let's say there are three doctors working together at a medical practice. Each doctor pays a 30% service fee that covers administration expenses like rent, reception, and office facilities. If an opportunity arises to purchase the premises they're working in, the doctors can set up a unit trust after consulting with their accountant and financial adviser.
This unit trust can borrow money to buy the premises. Each doctor has an SMSF, and each SMSF holds 33.3% of the units in the unit trust. When they pay the 30% service fee each month, this money is deposited into the unit trust, which is then distributed between their SMSFs.
This means they each receive a tax deduction on their medical business, and the rental income in their SMSF falls under the low tax rate of 15%. It's a great way to diversify their super assets and invest in a property that can benefit them in the long run.
How buying commercial property through your SMSF works
Firstly, ensure that you have the money for a commercial property purchase. This means having enough cash in your SMSF to cover a 30%—40% deposit and closing costs, such as stamp duty, GST (if applicable), application fees, legal fees.
Assuming you’ll borrow the funds to purchase the property, your loan will need to be structured under a limited recourse borrowing arrangement (LRBA), which protects your SMSF property if you default on the loan.
We dive deeper into LRBAs in our guide on using a Limited Recourse Borrowing Arrangement (LRBA) to buy property in your self managed super fund
How is the SMSF Loan repaid?
SMSF loans a typically obtained from a financial institutions who specialise in commercial borrowing with the help of a mortgage broker to apply for a limited recourse borrowing arrangement.
Repayment is made by the SMSF to the lender through regular loan repayments. The purchased property's ownership is held in a custodian trust until the SMSF repays the loan and acquires the title.
The asset must be held in a separate trust during the repayment period, and the SMSF can only have a beneficial interest in it.
Other considerations when buying commercial property through an SMSF
Renovating your property
When renovating a property under an SMSF, it's important to keep in mind that simple repairs and maintenance can be paid for with borrowed money, while significant renovations require cash directly available in your SMSF.
Using an LRBA to make substantial changes to the property is not allowed, and such renovations require a new LRBA.
Purchasing the property in the right name
When purchasing a property using a bare trust, it's essential to ensure that the property is bought and held in the name of the bare trust's trustee. All the details on the purchase contract and certificate of title must match the name of the trustee.
It's important to establish the bare trust before buying the property to avoid expensive stamp duty fees in the future. It's also good to remember that the lender will require you provide them with the the trust deed when applying for an SMSF Loan.
Looking to buy a commercial property in your self managed super fund?
Buying a commercial investment property with your SMSF can be a great way to build your wealth, especially due to the tax incentives that come with it. However, it's crucial to have a solid lending strategy in place, given the specific regulations that must be followed.
A mortgage broker who specialises in SMSF commercial property loans can help you create a strategy that aligns with your investment objectives and complies with regulations. With the right lending strategy in place, you can maximise tax benefits, reduce risks, and achieve better investment growth.
Settled Home Loans can help you with SMSF Commercial Property Loans. Get in touch with us today to learn more.
