Yes you can — but make sure you know the nitty gritty before you dive in.
There’s no doubt that self-managed super funds or SMSF can be a seriously good way to take control of your superannuation investment. So is investing in property a natural progression, something you’d be crazy not to consider for your SMSF?
To help you decide, let’s take a look at a critical piece of regulation called Limited Recourse Borrowing Arrangements (or LRBA).
By the way, did you realise how many Australians now have a SMSF?
As of mid 2020, more than 1.1 million people have chosen to take the plunge and become a SMSF member, rather than allowing their super to be controlled by a fund manager they don’t know.
It’s 21 years since SMSF became an ATO-regulated sector and nearly a third of Australia’s total superannuation assets are now self managed funds. An impressive number, especially given the extensive compliance and reporting that’s required if you have a SMSF.
Why you need to know about ‘limited recourse borrowing’
Whilst it is possible for an SMSF to purchase property without the need for borrowing, many SMSFs will need to obtain finance to fund the purchase. A Limited Recourse Borrowing Arrangement is the only way an SMSF trustee can legally borrow money in order for the fund to purchase an asset (such as property). A self managed fund can’t take out an ordinary mortgage. That’s why the pros and cons of LRBA loans are essential knowledge for anyone who wants to invest in property with their SMSF.
An LRBA loan has a number of special conditions compared to an ordinary home loan. In fact, not all of the banks or lenders offer them. Our team at Crosbie Finance can certainly point you in the right direction if you’re ready to start looking.
LRBA loans can only be used to buy a single asset — or a collection of identical assets with identical value. If a property sits across multiple titles, for example, the SMSF will likely need multiple LRBAs.
To proceed with this sort of loan, trustees will first need to set up a separate trust known as a bare trust, as well as potentially establishing a company to act as custodian of the asset and trustee of the bare trust. The custodian becomes the legal owner of that individual property, whilst any other assets in the fund will be owned by the fund trustee.
The ATO warns that LRBAs are “generally long term investments”.
It’s true there are lots of hypotheticals to carefully weigh up as you contemplate your next move.
- Can you be sure that your super fund will be able to meet the repayments over the life of the loan, remembering these could rise and fall significantly with interest rates? What if you lost your income and couldn’t continue to make the same (or any) super contributions? What if there’s a dramatic change in your life circumstances?
- If your SMSF is a family affair, you’ll need to consider what would happen if one of your fund members chooses to exit the fund. Perhaps they just want to retire so they won’t be contributing as much as they were.
- Is there anything in the fine print to stop the loan being called in early by the lender? And if this happened could your asset be sold in a hurry to repay the full amount?
As we all know, the unexpected can and does happen. These are scenarios to discuss with our team of SMSF Specialist Advisers.
All of these what-ifs certainly aren’t designed to put you off using your SMSF to invest in property. Clearly there are substantial rewards for many people who choose this popular option. However, it is worth noting that the SMSF can only be used for the sole purpose of providing retirement benefits to members and that residential property cannot be purchased from, or used by, the members of the SMSF or their related parties.
Our SMSF team can navigate you through the complex superannuation legislation to ensure that your fund remains compliant.
Being equipped with the right knowledge and strategy for your SMSF can make a world of difference to your long term lifestyle — and to your peace of mind along the way.
Are you keen to further explore the risks and rewards of using your SMSF to invest in property? Our specialist SMSF team at DFK Crosbie can help you understand limited recourse borrowing by answering all of your questions in plain English and exploring any scenarios particular to your situation.
If you’re ready to proceed, we recommend first speaking to our SMSF team who can ensure that the correct structures are in place, and can engage the Crosbie Finance team to help you identify a suitable loan. One that’s in line with your investment strategy and allows you to breathe easy as you build your superannuation investment, your way.