Investing in property through a self managed super fund (SMSF), as past of an investment strategy, has become increasingly popular in recent years. The good news is that it is now possible to borrow money to directly purchase residential or commercial property in your SMSF. In this blog, we’ll be covering everything you need to know about using a SMSF to purchase investment properties.
What Is an SMSF and How Does It Work?
Firstly, what exactly is a self managed super fund (SMSF)? Simply put, it’s a superannuation trust structure that allows individuals to take more control of their retirement savings. The SMSF is managed by its members who act as trustees. This means that the members have greater flexibility and can choose where they want to invest their money.
Can You Borrow to buy a SMSF Property investment
So, how do you purchase an SMSF property? If you don’t have enough saved in your superannuation fund for an investment property, SMSF borrowing could be the perfect solution. As long as you meet the conditions listed above, you can use your SMSF to secure an investment property under a Limited Recourse Borrowing Arrangement (LRBA).
A Pro-Tip, is that when evaluating where you're able to service a SMSF loan ie. cover your interest payments and property expenses, lenders only assess the financials of the SMSF itself, this mean that lenders do not complete a full serviceability review of your personal finances. Rather, lenders will use the rental income, from the future property, and any SMSF contributions to determine the income level of the fund.
So, if you've been building a property portfolio in your personal name, purchasing property through a SMSF can be a great way to increase your portfolio without increasing your personal liabilities.
Rules for buying a SMSF Investment Property
If you are considering buying a SMSF property, there are several rules you need to comply with. For example, the property must not be obtained from a relative of a member, not be resided in by a fund member or a member’s related parties, and pass the ‘sole purpose test’ of only providing fund members with retirement benefits.
Tax benefits to buy property in a SMSF
Using an SMSF can significantly increase your property investment options. You have the chance to speed up the growth of your savings before retirement, and be able to maximise your capital growth (and minimise your capital gains tax) by using your rental income to fund further property investment.
If you do choose to purchase a property through an SMSF, the fund must be used to pay 15% tax on the property’s rental income. For properties owned over a year, the fund will benefit from a third discount on any capital gain it makes after selling, reducing your capital gains tax liability to 10%.
How Much Money Do You Need?
Legally, there is no minimum balance required in your SMSF to purchase an investment property, but experts recommend having at least $200,000 available. The amount of money you require may not be fixed but having a sufficient deposit will cover the operating costs and initial fees required to run the property and the SMSF.
To purchase a residential property for your SMSF, it’s recommended for you to have at least 20-25% of the property value set aside as a deposit, as well as an extra 5% to cover the costs of finalising the purchase. To purchase a residential property in your SMSF, a deposit of at least 30% is required, plus 5% to cover the cost of completion.
Living in a property owned by your SMSF
Now, can you live in a house owned by your SMSF? Unfortunately, the answer is no. While you can use your SMSF to purchase a residential property, you are not permitted to live in that property while you are still employed, but you can rent it out as an investment property. You are also not permitted to rent the property to any other fund member or a relative of any fund members. This restriction is in place because the sole purpose of superannuation is to support you during retirement.
Live in my SMSF property after retirement
If your SMSF still owns the property, you can sell your existing home once you start receiving regular retirement income from your SMSF. You can then put the proceeds into your SMSF and arrange for the title of the property to be switched to you for you to reside in, as you have purchased your retirement property from your superannuation fund.
Investing in property through an SMSF can be a smart move for those looking to take control of their retirement savings and diversify their investment portfolio. However, it's essential to understand the rules and restrictions that come with purchasing a property through an SMSF to avoid any legal issues.
Is buying property in a SMSF worth it?
It's worth noting that managing an SMSF can be complex, and there are ongoing costs involved. Therefore, it's crucial to seek professional advice before making any significant investment decisions to ensure you're making informed choices.
In summary, investing in property through an SMSF can be a great option for those who have enough savings in their superannuation account and are looking to diversify their investment portfolio. Still, it's crucial to understand the restrictions and rules that come with SMSF property investments to avoid any legal issues.
Before making any significant investment decisions, it's essential to seek professional advice to ensure you're making informed choices.
Looking for advice to secure your SMSF Loan
Are you ready to harness the full potential of self managed super funds? At Settled Home Loans, we specialise in SMSF loans for either residential property or commercial property. Our team of Credit Advisers will walk you through the entire process and ensure your loan structure is set up correctly. Call us now at 1300 799 702, or click here to book a no-obligation Discovery Call. Let's work together to turn your SMSF into a powerful investment tool!
