Self Managed Super Funds (SMSFs) have become increasingly popular among individuals seeking to take control of their retirement savings and explore alternative investment options. One such avenue that has gained significant attention is using a self managed super fund to buy an investment property. This unique approach allows individuals to utilise their superannuation funds to invest in real estate, providing potential financial benefits and diversification opportunities.
In this Insight we’ll answer the questions most commonly asked of our specialists.
PPA have the team, skills, experience and partnerships to help you invest in both NDIS and non-NDIS properties leveraging your super fund.
how much can an smsf borrow to buy an investment property?
Strict and stringent controls are in place when it comes to lending to an SMSF, with the most popular vehicle involving a ‘limited recourse borrowing arrangement‘ (LRBA). Under this umbrella, a trustee can be lent funds by a third party provider to purchase a residential or commercial investment property under certain conditions:
- All income derived from the investment property must go back to the SMSF
- When buying an investment property using an SMSF, loan repayments must come from the SMSF’s bank account. Sufficient cash flow needs to be ensured to meet ongoing commitments
- If the borrower fails to repay the loan, the lender has limited recourse to recover their investment using only the property, or properties used to securitise the original loan. They cannot access other assets within the trust. As a result, lenders may increase their interest charges to accommodate this heightened risk.
In our experience, lenders will often lend up to a 70% loan to value ratio (LVR). Funds will need to be accessible within the fund’s bank account to cover the additional costs of settlement, including conveyancing, stamp duties and the like.
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can I rent property owned by my smsf?
All assets held within an SMSF trust need to pass the ‘sole purpose test‘ of providing retirement benefits to fund members, or to their dependants if a member dies before retirement. The asset cannot provide a pre-retirement benefit to someone (either a member, or a relation) through personal use of a fund asset.
When it comes to residential properties, this means no fund member, nor a related entity, can live in or rent the property. Commercial property, on the other hand, can be leased at market value to a fund member (or a relative) at market value if the property is used solely for business purposes.
can I sell my investment property to my smsf?
In an answer similar to the above, it depends on the nature of the property. If the property in question is being used for residential purposes, then no, an SMSF cannot purchase a property from a fund member or a relative of a fund member.
Conversely, a commercial property can be purchased from a member or a relative of a fund member, provided the property is sold to the fund at market value and is used for business purposes only. Failure to prove the above is deemed a breach of the super laws.
can I sell an investment property from my SMSF to myself?
While there is nothing explicit in the super regulations covering this scenario, it is important for fund members to be seen as doing the right thing in their fiduciary duties to the fund. Fund members must maintain an ‘arms length‘ approach with any commercial transaction, as if there was no prior relationship between the parties.
Assuming there are no conditions in the trust deed preventing the action, the selling of the investment property to a fund member or a related party must be at market price. This transaction can be supported through the engagement of an independent property valuer.
can i live in my smsf property when I retire?
As previously mentioned, the Australian Tax Office (ATO) sets two key rules that prevent using an SMSF-owned property for personal enjoyment before preservation age: the sole purpose test and the arm’s length test. You cannot use an SMSF property for personal use or provide it as accommodation for family/friends during the accumulation phase. However, this changes when you reach preservation age and unwind your super fund.
If the property is owned outright by the SMSF, with no outstanding loans, the option of an in-specie transfer to personally own the property after retirement may allow you to avoid stamp duty and capital gains tax. The in-specie transfer requires sufficient member entitlements and must be done at market value, and must be permitted by the SMSF’s trust deed.
can I airbnb my smsf property?
As long as the SMSF trust deed allows for it, an SMSF investment property can be purchased for, or converted into an Airbnb. Members will need to consider if the Airbnb activities constitute a business, and consider both the tax and GST implications. The investment strategy must address the risks and potential gains of a substantial acquisition like an Airbnb property, as well as the diversification and liquidity profile.
The strategy should be reviewed and updated regularly and it is important to note, the Airbnb property cannot be used personally by the member or related parties unless it’s classified as a business. Cashflow is a major consideration, as tourist industry ebbs and flows can mean high seasonal yields but potential vacancies.
for further information
Purchasing an investment property using an SMSF can be a great alternative to traditional property or stocks and bonds, however it is important to understand the SMSF rules and seek guidance from professionals who specialise in this niche area of property investment and SMSF lending.
As previously mentioned, we have the skills, expertise and partnerships necessary to help you purchase properties, both NDIS and non-NDIS, using your super fund. If you would like to schedule an obligation free chat to discuss your specific scenario, please email or phone us using the details on our Contact page.
Happy investing.
