Holding direct property is one of the main drivers for investors choosing to start a self-managed super fund. With SMSF loans available to purchase property and super-charge the growth of your investment, it’s no wonder many Aussies are thinking about buying real estate with SMSF. But not all property types are compatible with limited recourse borrowing arrangements (LRBA). We take you through what real estate types are available in super and how to decide on the best one for you.
What is a limited recourse borrowing arrangement?
An LRBA works similarly to a standard mortgage on a home. The SMSF trustee takes out a loan and uses the funds to purchase an asset — in this case, property. The SMSF property investment is then held in a separate trust until the loan has been repaid in full. Because the real estate is held in a separate trust, the funds’ other assets are not used as security for the loan, so if the trustee defaults on the loan, the lender only has a legal claim over the property they financed.
What property can I buy with an SMSF loan?
A popular choice for SMSF investors, residential real estate can be leased out to tenants on a long-term basis, providing steady rental income. As trustee, you can take care of all the landlord duties or outsource to an agency to manage the day-to-day running of the rental.
Holiday House or Bed and Breakfast
Technically speaking, holiday homes and short-term accommodation housing are treated the same as residential property for all SMSF loan purposes. However, you’ll likely need ot have a more hands on role with this type of real estate. A holiday house is expected to be furnished and maintained in regard to cleaning, supplying basic appliances, crockery and linen. Depreciation can be claimed as a tax deduction for many of the furnishings and appliances, which would not normally apply to a residential rental property.
It’s important to note that members or related parties aren’t allowed to stay in holiday homes while they’re vacant without turning the value of the house into an in-house asset and running the risk of contravening the sole purpose test.
A commercial property is any real estate used for business activities. For example, industrial buildings, shops or even car parks. The rules for commercial property vary greatly to those of SMSF residential property; members of the fund are able to use commercial buildings for their business activity, effectively making themselves their own landlord and reaping the benefits that come with that.
If you’re trying to choose between residential and commercial real estate, and you own a business that operates out of a fixed building, you may find that renting the commercial building from your SMSF may attract tax benefits that far outway those available from residential real estate.
If the real estate is used for business purposes — such as farming — it is considered Business Real Property and can be purchased with an SMSF property loan. If you’re looking to buy a hobby farm or a large block that isn’t used for any business operations, you won’t be able to get a loan.
What types of property are not available to buy with SMSF loans?
An LRBA is a legal agreement in Australia that can only be used to purchase a single asset. This means there are limitations regarding certain types of real estate.
You will not find a lender who will finance the purchase of vacant land through an SMSF. Further, an LRBA is for a single acquirable asset only, which means if you did purchase land with a SMSF loan, the single acquirable asset rules would prevent you from making any changes to the asset, i.e building a house on it. You could always use vacant land for car parking but it likely wouldn’t provide the type of return you’re looking for.
International Real Estate
While you’re free to purchase property internationally if your SMSF has enough funds, if you require finance, international property is not allowed. This is primarily because an LRBA is an agreement relevant to Australia and it is too difficult to facilitate that type of contract internationally.
As mentioned above, a large block of land considered Business Real Property is fine to purchase with an SMSF loan, but a sizable block without any clear business use will be tricky, if not impossible, to finance.
There are many different types of properties available and each one suits different needs and investment strategies. With careful consideration, there are many benefits that can be taken advantage of when choosing the SMSF property type that suits your situation and needs. Book a call with one of our SMSF Loan Experts to discuss your property needs.