If your SMSF is not borrowing money to purchase property there is very little restriction on the type of property it can buy – as long as there is sound investment logic behind the purchase. If you’re SMSF does need to borrow to make the purchase – which for most people will be the case – there are several types of property which are unlikely to be able to purchased by the fund. Today we look at what some of those property types are what you can work within these lending limitations.
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Choosing the right property for your SMSF investment
Let’s talk about what kind of properties a Self Managed Super Fund can purchase – a question we get asked a lot. We find that a lot of our clients are feeling a little bit exotic when it comes to selecting a property for their Self Managed Super Fund and we end up having very interesting conversations about very interesting properties. If a Super fund is not borrowing any money to purchase a property, there is virtually no restriction as to what type of property can be acquired – it could be a block of land, it could be a house, a townhouse, an apartment, student accommodation, serviced apartment, it could be a commercial property, a factory, we’ve had a brewery, it could be a boarding house, you name it, a shop, an office are all perfectly fine. As long as there is an investment logic behind the purchase and the Super fund is not borrowing any money, you will find that you have virtually no restriction – it could be in Australia, it could be overseas – no problem.
If you’ve got an SMSF or you’re looking to set up an SMSF which is cashed up and you’re not intending to borrow, this is very simple – you can pretty much buy anything you want, anywhere you want.
Considerations for choosing SMSF Property
If you’re going to need to borrow money — which is the case for most people — to purchase the property there’s a few things you want to take out of that list of property you can purchase. The first one is international property – it’s almost impossible to set up a compliant limited recourse borrowing arrangement for an overseas property. So if you have cash — fantastic! If you need to borrow — forget Phuket, forget the US, forget Vietnam, you can’t do it. The other type of property that you want to rule out is land – there is not one lender out there who is going to lend money to an SMSF to purchase a block of land. So if you need to borrow, land is a no goer.
Other things that are going to be extremely difficult to secure funding for are going to be student accommodation – it has many problems for SMSF lenders. The size of them, the value of them – the fact that they’re generally located in very high density areas or generally high density buildings, the fact that there’s a lease back to the person running the student accommodation. For these number of reasons student accommodation is virtually impossible to fund through a Self Managed Super Fund. In that category would also fit serviced apartments – they are marginally better but they are also extremely difficult to get any lending and when it is possible it is a much lower loan to value ratio than people would like. So student accommodation and serviced apartments are not so good.
You also have restrictions around really big properties. So if you’re looking at rural properties, if it is a property that is generating an income from an agricultural activity – no problem. If it’s just a big hobby farm it’s going to be very very complicated, so ‘buyer beware’ of those types of properties. We do get a lot of enquiries around rural property – farms and hobby farms and big plots of land and this is very very complicated to finance.
These are your main considerations – there is a strategy which may help some people around those specific assets. What if you really want to buy that student accommodation and you don’t have the cash in the Super? There is one strategy which is called related party lending, where you become the lender for the SMSF and in doing so, bypass the limitations that the lenders impose on some of those securities. That’s a topic we’ll cover in another video, but related party lending could be your solution.
* The information contained in this blog is general information only. No part of this blog is to be construed as a solicitation to buy or sell any security or financial product. The author, in preparing this blog, did not take into account the investment objectives, financial situation and particular needs of any particular person. Before acting on any information or advice in this document, you should consider the appropriateness of it (and any relevant product) having regard to your circumstances. You should also seek independent financial advice prior to acquiring a financial product.