Self Managed Super Fund Loans

Superannuation funds can borrow money to purchase real estate. A person who has a Self Managed Super Fund (SMSF) can purchase a property using their superannuation and utilise the tax benefits and other features of the loan.

The Superannuation Industry Supervision Act 1993 (SIS ACT) was amended in September 2007 to allow super funds to borrow to invest in any asset they are normally allowed to acquire, including property. This enables Self Managed Super Funds (SMSF) to purchase real estate without sufficient funds to complete the purchase outright, as well as take advantage of the same gearing options available to regular property investors. Full details are available in section 67(4A) of the Act.

How a SMSF purchases a property

You can now choose any kind of property including residential, commercial, retail, and holiday units for a property leveraged investment. Be aware that the SMSF can only purchase property from a member or related entity for business purposes – any residential property must be purchased from an arm’s length vendor:

The SMSF obtains a loan approval.
The SMSF’s conveyancer acts on the purchase in the ordinary way. The purchase MUST be in the name of the Property Trustee.
The SMSF pays the deposit, the balance purchase money (less the amount borrowed), the legal costs, and stamp duty.
On completion of the purchase, the Property Trustee mortgages the property to the lender.
SMSF then manages the asset in the same way as any other real estate investment.

How a SMSF leveraged property investment is structured

The legal owner of the real estate will be the Property Trustee.
The beneficial owner of the real estate will be the SMSF.
The lender has no recourse to the other assets of the SMSF, providing the SMSF with absolute protection for its other assets.
The loans are personally guaranteed by the member/s of the SMSF (subject to credit approval).
SMSFs can deal with the property however and whenever they like, in the same way as investors deal with investment properties (eg: lease, renovate, repair, or sell), subject to the terms of the relevant loan and mortgage.
All rents are paid direct to the SMSF.
Loan repayments are made in the ordinary way from the SMSF.
The SMSF can pay out or reduce the mortgage at any time (subject to the terms of the relevant loan).
When the mortgage is paid out in full, title to the property can be transferred to the SMSF or the Property Trustee can continue as registered proprietor.

Laws governing SMSF leveraged property investment

There are a number of laws governing SMSF leveraged property investment which you need to understand prior to committing to any loan products. While they may appear complex, professionals who are properly accredited in SMSF leveraged property investment transactions can readily assist you in understanding and abiding by these laws.

How to acquire a SMSF leveraged property investment

Loans for SMSF leveraged property investments are available through a number of lenders in Australia. Loan terms and features, including interest rates, LVRs on residential or commercial securities and the loan term and amount, will vary widely between lenders. As a general rule, the following steps will occur:

Establish or review SMSF
Establish the Property Trust Deed
Instructions to Solicitors/Conveyancers
Obtain loan approval
Contracts exchanged
Loan documents issued
Settlement

Prior to entering into any proposed transaction, you should independently evaluate the risks of such a transaction and your ability to assume such risks from your adviser.

For more information on superannuation fund loans