SMSF Borrowing To Buy Property – The Suggested Rules To Follow

An SMSF is a type of retirement fund you run yourself. This is the main reason it very popular as it allows fund members to choose how and in what to invest in. With self-managed superannuation fund you can even buy a property. And it is not restricted to a residential property only. SMSF can be used to purchase commercial and industrial properties and even (under certain circumstances) a farm. Hence, SMSF is becoming the most preferable way to borrow money to buy properties. It also has the best tax incentive for property investing.

SMSF Borrowing To Buy PropertyHowever, SMSF borrowing to buy property are normally done under very strict rules. If you want to set up an SMSF intended to invest in a property, here’s what you need to know.

1. You must comply with the rules. The property must:

  • Exclusively provide retirement benefits to the members of the fund.
  • Not be obtained from a related party of a member.
  • Not be occupied by a fund member.
  • Not be rented by a fund member.

2. SMSF borrowing to buy property involves certain risks such as:

  • Substantial losses to SMSF – If you fail to properly set up all documents and contract regarding the property (this automatically means your SMSF is not in compliance), you will not be allowed to simply undo the whole arrangement. You will be most likely ‘forced’ to sell the property and will lose a substantial amount of money in the process which will greatly affect the overall portfolio of your super fund.
  • Higher interest rate – SMSF property loans have a tendency to cost more compared to other property loans. This means you will be paying higher interest rate and higher interest rate means higher monthly payments. This is something to consider when making your investment decision.
  • Higher Cost – This risks refers to the fact that money borrowed from SMSF can only be used to maintain purchased property and in no way can the money be used for any improvements.

3. What lenders look for:

  • The deposit should be at least 30% of the property value.
  • The structure of the SMSF must be in compliant with ATO and ASIC rules.
  • How frequently members make contributions to the fund.
  • Investment strategy.
Aiden Jones

Aiden Jones is an Australian student and a freelance writer. When not studying, Aiden spends time reading about different industrial equipment, information technology (computers and networking) and sports. With his elegant writing, Aiden enriches readers with his personal perspective and never steers away from the hard truth.