How to Get SMSF Loans
Investing in real estate is an incredible way to grow your nest egg. That’s especially true for Australians or anyone who can secure a self-managed super fund or SMSF loans to increase their purchasing capacity and acquire multiple rental properties.
Today, we’ll walk you through the steps, rules and frequently asked questions about SMSF loans. We hope this guide helps you grow your super and retirement savings.
What is SMSF or a self-managed super fund?
Before talking about SMSF loans, it’s crucial to discuss SMSF first. It’s a private superannuation fund that you manage on your own. Compared to corporate or industry super with millions of members, an SMSF can only have a maximum of six members. You can establish an SMSF or have it with your spouse and other relatives.
One key difference with SMSF is that the members are also the fund trustees. It allows you to be more flexible about your fund investment. You have the liberty to pick the assets to grow your SMSF, such as shares, bonds and investment properties.
SMSF can be rewarding, but keep in mind that it also comes with more risks than other types of super. It’s highly regulated; non-compliance can incur hefty penalties. Also, it takes a particular skill set, time and resources to manage your own fund. Fortunately, you can seek the guidance of your trusted financial adviser to help you with the SMSF setup, rollover of funds from industry super, strategy-making and SMSF loans.
What is an SMSF loan?
Years before, SMSFs could only acquire assets if they had enough funds. But, in 2007, that rule began to relax. Today, you can get an SMSF loan under Limited Recourse Borrowing Arrangements or LRBAs to fund your real estate purchase. You can boost your SMSF with rental income without taking out a huge sum from your super fund.
After the rental property purchase, property ownership will be placed in a custodian trust until the SMSF has repaid the loan. The income generated from the investment property will go to SMSF to help repay the loan and boost its fund value.
While you can get SMSF loans to acquire residential or commercial property, the purchase should pass the Australian Tax Office’s Sole Purpose Test. That means you must prove that the sole purpose of buying the investment property is to provide or boost the retirement income of SMSF members—which is the primary goal of super funds or SMSFs.
What are the rules and limitations of SMSF loans?
While LRBAs allow you to buy a property through an SMSF loan, you still have to follow strict rules. We’ve rounded up some of the most notable rules below:
- For every SMSF loan, you can only purchase a single asset. That means you can’t spend the loan to acquire multiple properties or different shares. If you want to buy more assets, you have to apply for separate SMSF loans for them.
- You can’t improve the property until you’ve repaid the loan. Adding a room or extending the living area is not generally allowed under LRBAs, as it increases the property value before the loan settlement. However, you can repair certain parts of the rental home or building to prevent deterioration.
- You (or another member) can’t live in an SMSF property. Doing so might compromise the SMSF’s compliance with the sole purpose test set by the ATO. The property has to generate income to fund the SMSF’s loan repayment, grow its fund and secure the members’ retirement savings or pension. Your SMSF can’t achieve that if a rental property becomes a residence.
You (or any member) can’t get direct benefits from the acquired property. However, if it’s a commercial property and you own a startup, your company can rent it. With that scheme, your SMSF still complies with the sole purpose test as your business pays monthly rent to the SMSF and benefits the members.
Why should SMSFs invest in real estate?
Even with rules and limitations, taking out loans to purchase real estate is still highly rewarding for SMSFs. The long-term nature of property investments makes them an excellent vehicle for SMSFs to generate stable income and capital gain.
Other benefits of borrowing money through SMSF to invest in properties include:
- In Australia, rental income is taxed at the concessional rate of 15 per cent.
- Expenses are tax-deductible, and capital gains tax for property investments is lower than for other assets.
- Superannuation assets are protected from creditors in bankruptcy situations.
Which lenders provide SMSF loans?
SMSF loans are a specialised type of lending, so only a few banks grant loans to SMSFs. These banks include Bank of Queensland, Liberty Financial, Switzer Home Loan and La Trobe Financial. But your choice of bank or lender can be further narrowed down depending on the type of property you wish to acquire. You can also hire SMSF loan experts to connect you with the most suitable bank or lender.
How much can an SMSF borrow?
The amount of money you can borrow through SMSF depends on your financial situation and your lender’s policies. You can find specialty lenders offering SMSF loans that range from $100,000 to $4M. But they might require you to maintain a certain amount within your SMSF and keep a set percentage of liquid cash. Some lenders might agree to waive such requirements if you provide an initial deposit that is large enough.
What are the requirements to get an SMSF loan?
Most specialty lenders have four general requirements for SMSF loans:
- The property purchase must pass the sole purpose test.
- The property must not be bought from an SMSF member or any related party.
- If the property is residential, SMSF members or any related party can’t live in or rent the property.
- The property should be a single acquirable asset.
What do you need to do before you apply for SMSF loans?
As the trustee of your SMSF, you have to seek independent financial & legal advice. You should make sure that the move of borrowing money through your SMSF to buy an investment property is compliant with LRBAs and ATO’s sole purpose test. The financial & legal advisers will also help you establish the trust structures required for an SMSF loan to comply with Australia’s existing superannuation laws.
Do you need to hire an SMSF loan broker, too?
Apart from hiring a financial adviser & lawyer, it would also help to seek the advice of an SMSF loan broker or specialist. This professional will help you find the SMSF loan that suits your SMSF investment strategy. And if you are new to SMSF lending or haven’t established an SMSF, an SMSF loan specialist can help simplify the process.
I’ve been in the finance industry for over 15 years and am now a leading expert on SMSF loans. I enjoy writing about personal finance and want to share more with other Australians who are looking for guidance and support in their financial journey.