Buying property in your SMSF

Property investment is popular with many people for many reasons. Many people see property as a safe investment and they feel comfortable investing in property as they have often done it before. So it is no surprise that property is a common asset help in SMSF and there is more and more SMSF trustees investing in property, especially where there is an ability to borrow to do so! 

There are several ways a fund can acquire property, including:

• Purchasing the property with existing superannuation cash in the SMSF
• Borrowing to purchase the property where there is not enough cash, and
• If the property is classified as business real property the property may be in-specie transferred into the fund via a

It is always important to ensure all transactions are conducted at arms-length and on commercial terms and recorded at current market values.

Here are the steps you need to consider taking to purchase property through an SMSF.

 

Establish the SMSF

If you are going to borrow money to acquire property you then you should have a corporate trustee structure for your fund. Most banks prefer an SMSF with a corporate trustee,

1.  Roll in your existing superannuation

It can take a number of weeks to receive a member’s rollover entitlement from another fund. To avoid being caught out with no cash to pay for the property deposit or settlement, you should arrange your rollover promptly.

Please keep in mind, if you rollover or cease making contributions to your existing provider, you may lose any insurance benefit you currently have in place. You should consider whether it’s beneficial to leave a small cash balance in that fund and continue to make contributions to the old superfund to preserve your insurance or seek Financial Advice to arrange direct insurance in your SMSF.

Obtaining insurance is not always easy so we strongly recommend you speak to a Financial Adviser prior to commencing any rollovers. It is a requirement to consider super through your SMSF.

2.  Obtain loan pre-approval

Where you intend to borrow to purchase a property then you should talk to the bank first. There very few banks who offer SMSF Property Loans with many banks retreating from this space.

It is important to find out if you first qualify and to understand what percentage they are willing to lend (LVR) as an SMSF loan will differ to a normal home loan. Consideration should also be given to the interest rate and fees but also it is important to understand what documentation the bank requires in order to approve a loan. Due to the risks associated with borrowing in super, most banks require a formal statement of advice as evidence you have sought the advice of a licensed financial adviser who has analyzed your specific personal situation and recommended borrowing is suitable for you.

3.  Arrange for employer contributions to be directed to the SMSF

The fund needs to ensure that at all times it has sufficient cash to service the loan and cover any expenses which arise. An SMSF is not permitted to have a bank overdraft or member loans and if this occurs it is considered a compliance breach. Arranging for your employer to make

your super guarantee contributions into the SMSF can assist with the cash flow of the fund, especially if at any time the property is not rented.

4.  Source the property

Once it’s confirmed with the bank how much the fund can borrow it is possible to then establish how much the fund has to spend.

It is important to allow for all costs which cannot be financed such as any improvements required to the property, these cannot be financed by the original loan. Be sure to leave enough cash in the SMSF’s bank account for unexpected expenses such as repairs and maintenance which may be required before the property can be leased.

5.  Signing the contract and establishing the borrowing structure (Holding/Bare Trust)

Depending on which state the property is located will dictate whether the bare trust needs to be established before the contract is signed. Care also needs to be taken to ensure the correct purchaser name is on the contract as the requirements here also vary from state to state.

6.  Obtain final loan approval and vetting of documents

Once the Contract, Borrowing Structure and required documentation have been completed and signed the, bank can provide final loan approval and sign off on the loan documents.

7.  Property settlement

Once the settlement has occurred the property can be settled by the bank. 

Check what the requirements are for your relevant state for the naming on the initial contract.

Depending on which state you are in, it may not be possible to have the contract signed ‘and or nominees’. 

Check which name you need to have recorded on all other documentation as the naming requirements vary from state to state.

Also, ensure the loan is in the correct name as this is also very important.

Ensure all property expenses, such as stamp duty are paid for by the SMSF and not the member as this may cause duplicate stamp duty issues.

  

The advice provided is general in nature and is not personal financial product advice. The advice provided has been prepared without taking into account your objectives, financial situation or needs and because of this you should, before acting on it, consider the appropriateness of it having regard to your objectives, financial situation and needs.