Five Things to Consider When Buying Property in Your SMSF

five-things-to-consider-when-buying-property-in-smsfOne of the benefits to running your own self managed super fund is having greater control over the management of your investments. When the rules were changed in 2007 to allow for borrowing inside superannuation, this paved the way for property to be a consideration for many trustees of SMSF’s.

The changes to the rules in 2007 meant that limited recourse borrowing arrangements (LRBA’s) enabled a super fund to borrow money to buy property. In the event that a property is sold by the lender due to default, an LRBA means that the lender can only recover against the property and not the other assets held by the Fund.

The following are some of the things you need to consider when buying property in your SMSF:

1.  Is a Property The Right Investment for Your Fund?

As part of your investment strategy, you need to ask yourself if buying a property in your SMSF is going to improve your retirement outcomes.

The purpose of any investment is to maximise your returns and this is probably more important when it comes to your superannuation. The key to maximising your investment return is to ensure that you purchase the right property. We cannot stress enough the importance of doing your research!

2.  What Structure Do You Need?

An LRBA must be set up correctly. A trustee company usually acts as the trustee for your super fund as well as another trustee company that acts as trustee of a special purpose trust. It is this special purpose trust that holds the asset in trust for the beneficial owner ie the super fund.

The property is then purchased in the name of the trustee for the special purpose trust however, the loan is taken out in the name of the super fund.

3.  Is Your Trust Deed and Investment Strategy Current?

Some trust deeds do not allow for a Fund to purchase property, especially if the trust deed is an old deed. To update your trust deed is a relatively easy process however, there are costs involved in doing so.

You may need to update your investment strategy to reflect investments in property. There may also be costs involved in doing this.

4.  Cash Flow Management

We recommend that you seek advice to discuss your borrowing power. You will need a deposit for the purchase of the property as well as enough money to cover legal expenses and stamp duty within the Fund.

Rent received by your SMSF will be taxed at a maximum of 15%. Loan repayments and the costs of repairs and maintenance are also paid for by your super fund and not from further borrowings.

If the property is a large portion of your super fund, then this can cause cash flow problems as it is an illiquid asset. If your super fund is unable to meet its debts then the bank can repossess the property. They can’t touch any other assets, which is why some lenders will ask for a personal guarantee from the trustees of the SMSF.

Also, if the trustees are in pension phase and the property is the only asset of the Fund, then it may not be able to pay sufficient income for the retired members.

5.  Responsibilities

As trustee, it is your responsibility to ensure that the documentation is correct and that you will have sufficient funds to meet your debts, as well as any pension payments. There are some pretty tough penalties if you don’t get it right.

Would you like more information? Give us a call today! You can also read about running your own SMSF here.