While SMSF trustees are granted the same benefits as of any other corporate or retail super funds, the major difference and the main attraction for many people is the ability of trustees to take personal control of the assets invested. Buying a property using the Self Managed Super Fund is a popular and efficient strategy for SMSF investments. We provide investors with full SMSF administration services. We can help SMSF Trustees set up a Bare Trust structure that allows them to purchase a property with loans.
Investing in property with a SMSF can include both residential and commercial real estate. However, as a Trustee, several crucial rules affect your property investment:
- The property cannot be your residence
- The property cannot be used as a holiday house and neither you nor your family member is allowed to live in the property
- The property should be used solely for investment purposes
A few factors you should consider before using Self Managed Super Funds for property investment are as follows:
- It is recommended that you start an SMSF first before investing in property. Since an SMSF cannot independently borrow money, a Bare Trust structure also needs to be set up to facilitate the loans
- Sometimes known as Property Trust, a Bare Trust’s main function is to secure the investment property until the loan is paid off
- A SMSF can pay all expenses associated with the property
- All other operating expenses, including rental income, are channelled to the SMSF
- Only one property is allowable in this Bare Trust structure
- Once the loan is paid, the property stays with SMSF
- Funds can be borrowed from several sources including you, the trustees or the bank
- The SMSF receives a limited recourse loan – a loan which, upon default, the bank does have a resource on the SMSF. This means that if the SMSF fails to pay the loan, the bank can only recover its loan from the property invested and not from any other asset or funds associated with the SMSF
- As a result, banks usually require a personal guarantee on the property from the SMSF members
- When Trustees guarantee the loans, the maximum Loan to Valuation Ratios (LVR) is generally 70% for commercial property and 80% with residential properties
- The bank may not ask for guarantees if the loans have a 60% LVR
- If the lender is one of the Trustees, then you do not need a bank.
- The Trustees can also borrow from the bank and lend the same money to the SMSF. This option makes SMSF administration easier.
- All transactions are made through the SMSF since Corporate Trust and Bare Trust are barely legal firms for holding the property.
- We charge a one-time fee to structure these entities and maintenance we do not have a maintenance fee.
Normally, loans are not applicable to SMSF. For purposes of property investment, an SMSF can use a Limited Recourse Borrowing Arrangement. The members of the SMSF offer a guarantee to the bank for the loan inquired. Trustees can consult mortgage brokers to help them evaluate lender options and find the most appropriate loan.
To make loan processing easier we issue the SMSF a Trust Deed. The deed ensures a faster approval at the bank.
Repair and Maintenance
Repair and maintenance costs for an investment property can be deducted in the SMSF. The SMSF also covers interest, insurance, body corporates fees, property management among others. You can find out more on the rules and guidelines in the “ATO for the difference in improvements vs. repairs”
What titles should the SMSF use while investing in property?
You should use the Custody Trust’s name, for instance:
- A corporate trustee can use “XXX Pty Ltd ACN number ATF XXX Custody Trust”
- An individual trustee can use “Josh Simmons ATF XXX Custody trust”
Land registries are strict when it comes to registering a company name. Generally, the registries do not allow any reference to a Custodian Trust. The credentials that should be used must include the custodian’s legal name and not the Trust. This applies in several instances such as:
- When the SMSF involves an individual trustee, use the names of the individuals like “Josh Simmons or Mary Simmons”
- When the SMSF uses a corporate trustee, include the names of the corporate trust e.g. XXX Pty Ltd ACN number”