Borrowing within a Self-Managed Super Fund (SMSF) to purchase property has been a popular wealth creation strategy for more than 15 years, with an estimated $44 billion worth of both residential and commercial property sitting in SMSFs that has been acquired using a Limited Recourse Borrowing Arrangement.
The four major banks have stopped offering this product over the last few years, however this has opened the door to various specialist lenders making the market very competitive from a pricing standpoint.
What are the requirements?
Within the residential property space there are certain requirements for a property purchase using an LRBA – lenders will use the property being purchased as security however the property has to be held within a Bare trust that holds the property on trust for the SMSF until there is no debt on the property.
There are some other key considerations to note:
- On some occasions they can do off-the-plan-purchase
- There cannot be multiple dwellings
- They will not lend for vacant land; and
- They run on a case-by-case basis for rural lending
The servicing for residential LRBAs includes 80% of gross rental repayments, 100% of contributions and 100% of any additional voluntary contributions post tax. The amount the lender will allow to be borrowed is a maximum of up to 80% which is the loan-to-value ratio (LVR. From a commercial standpoint the LVRs can differ based on the property’s location. Most of the specialist lenders will allow for an LVR of up to 80% for a commercial property with some sitting at a maximum of 75%. The serviceability is very similar for both commercial and residential where the lenders use 80% of the gross rental/lease agreements for the commercial property.
What are the benefits?
The ability to house not only residential properties but also commercial properties within your SMSF using a LRBA gives investors the chance to diversify their portfolios. Having an LRBA in place can help protect the other assets within the SMSF from recourse or from the lender selling off those assets to recoup any additional losses in the event of a default. When holding a property for a period greater than 12 months the amount of capital gains that can be applied will drop from 15% to 10%.
Superannuation income is taxed at 15%, and at a rate as low as 0% when special conditions are met in retirement age. The concessional tax rates apply to both the rental income as well as any capital gains resulting from the sale of the property.
If you’re currently renting business premises, using superannuation to purchase those premises could mean paying off your own asset as opposed to paying off someone else’s investment. Holding business premises within an SMSF can also provide asset protection against any future claims or liabilities that could result from operating the business. If the property is held in an SMSF, you can guarantee and secure the businesses tenancy for the longer term.
It is important to discuss this strategy with your advisor and broker to determine how best to safeguard your assets moving forward. If you’d like to know more please contact us to discuss.
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This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.