Investment Property

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The SMSF can invest in commercial or residential properties, but not your own residence. You cannot have any dealings with a related party when investing in residential property, as a result you cannot live in a property you want to invest in. However family members can use it, or you can use it as a holiday house.

 

Some important points regarding the use of SMSF for property investment:

• To invest in property, it is important to set you the SMSF first. An SMSF itself cannot borrow money, so a Bare Trust structure is put in place to facilitate the loans

• The purpose of the Bare Trust (also called Property Trust) is to keep title over the investment property until the loan is paid off

• All related property costs can be paid by the SMSF

• The SMSF receives rental income and pays for operating expenses and loan repayments

• Only one property can be added into a structure like this

• The property will revert to the SMSF when the loan is repaid

• Funds can be borrowed from the Trustees or the bank, or both

• The loan type banks give the SMSF is is a limited recourse loan, meaning the bank does not have a recourse on the SMSF should the loan default

• For this reason, banks usually ask for personal guarantee over the property from Trustees

• The maximum Loan to Valuation Ratio (LVR) is around 80% with residential properties, and around 70% with commercial properties when members guarantee the loans

• When there's a bank loan and a 60% LVR, the bank may not require guarantees from Trustees

• the lender to the SMSF can be Trustees as well, so you don't have to use a bank

• Trustees can borrow from the bank and then on-lend to the SMSF

• The Bare Trust and Corporate Trustee are merely legal entites for holding the property and all transactions take place in the SMSF

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A SMSF cannot incur any loans, so to purchase a property an SMSF can use a Limited Recourse Borrowing Arrangement. In this arrangement the Trustees would provide a guarantee to the bank for a loan. Trustees can use a mortgage broker to help them find the most suitable loan for their circumstances from a panel of lenders.

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When we set up a Limited Recourse Borrowing Arrangement for an SMSF, we issue a new Trust Deed. This will make loan approvals of the bank a smoother process.

 

Repair and Maintenance

When repairs or maintenance are undertaken in an investment property, these costs can be deducted in the SMSF. See the following guidelines.

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What name should the SMSF use with property investment?

Use the Custody Trust's name. For land registries, they generally do not accept references to a Custodian Trust. Therefore the transfer of land should be regisetered in the custodian's legal name.