Can you use an SMSF loan to finance commercial property?
Using your SMSF to buy commercial property is possible, and so is getting a lender to agree to a loan. There are a number of benefits to using an SMSF to purchase commercial property, as long as investment decisions are made wisely, and rules around SMSF investment are properly followed.
How do SMSF loans for commercial property work?
The key thing to remember is that the point of a super fund is to support retirement. Any decision an SMSF trust makes around purchasing commercial property must benefit the retirement of the members.
Any investment must also be in line with the overall investment strategy of the SMSF, including diversification of assets, as well as the Superannuation Industry Supervision Act 1993 (SIS Act). Additionally, the Trust Deed must allow members to purchase property, to borrow money, and to mortgage property for repayment.
When it comes to using SMSF loans for commercial property, one of the more common arrangements is for the trustees to lease the premises to a business owner who is also a member. By doing so, it means that the rent is coming back into the fund, rather than to a private landlord. SMSFs can invest up to 100 per cent of funds if a trustee is running the business and the diversification rules allow it.
What you need to know about SMSF loans for commercial property
As with any property investment, there will be terms and conditions applied by the lender. Some lenders forbid renovations, for example, while others have no restrictions. The following are key points that should be considered alongside the details of any loan agreement.
- Borrowing amount and interest rates: With a commercial loan, you are able to borrow 70 per cent of the property value. If you were purchasing residential property, you'd be able to borrow up to 80 per cent. SMSF commercial loans may be subject to a higher interest rate, and the lender may limit the loan amount to minimise their exposure to risk.
- Repayments: The SMSF is responsible for making repayments to the lender in the normal way. Any rent income charged on the property is paid into the SMSF.
- Security property: The lender may also not accept non-standard commercial/residential property as security - such as development sites or vacant land. They are more likely to accept residential properties, offices, shops or warehouses, for example, because they are standard-use properties that may be easier to sell and profit from should the need arise.
- Non-recourse loan: Possibly one of the most important things to know about is the government-introduced Limited Borrowing Recourse Arrangements (LRBA). The aim of the LRBA is to enable SMSF holders to borrow with minimal risk. Having an LRBA means that the SMSF's other assets are kept separate, and cannot be accessed by the lender, should they need to recover their loan.
- Rental agreement: If the commercial property is leased to a business owned by a member, the rental amount must be set at the market standard - there can't be any deals or concessions made. The payments must be paid as per the terms of the lease and as if renting from a private landlord.
- Additional costs: As with any property investment, it's important to consider the additional costs outside of your actual purchase. Your property purchase may include costs such as stamp duty, while ongoing expenses such as strata fees or property management could affect return on investment.
- Transferring title: Once the property loan repayments have been completed in full, the SMSF can have the title transferred to it without incurring taxes and other liabilities. This is along as the trust is set up appropriately, according to current laws.
- Fluctuations: Using an SMSF to purchase property comes with many of the same risks inherent in any such investment. Interest rates and property prices are always subject to change, which means you should ensure you have sufficient funds available to cover your costs.
Navigating the world of superannuation funds is a confusing business, but one that can pay off in the end. At Red Rock Mortgages, we help people make the most of the financial investments and can provide expert advice about SMSF loans and commercial property investment. Contact us today for more information.