Investment Property

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

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.

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.

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.

 

  

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