When you’re building towards a comfortable retirement, there are so many things to keep in mind. From planning to budgeting, stacking up the innumerable saving bricks takes a fair bit of time and effort. One method that is steadily growing in popularity is property investment – and thanks to changes in legislation, you can now use your self-managed super fund (SMSF) to invest in the buoyant Australian market.
Self-managed super fund loans are a solid way to do this. If your fund doesn’t have the resources to purchase a property in full, you can borrow to make up the balance. However, before you embark on this route, keep these few tips in your back pocket.
1. Keep at arms length
The first thing you’ll need to be aware of when gearing your SMSF towards an investment property is that the sale must be made at ‘arm’s length’. While the fund can purchase any commercial or residential asset, the transaction has to be with a complete stranger. For example, you cannot sell your own home to the fund, or receive rental income from a property lease by a relative, friend or associate of you or other fund members.
2. Laid in bare trust
Another stipulation of SMSF borrowing is that the property needs to be owned in bare trust. In essence, this means that a trustee separate to the fund holds the legal title to the asset until the SMSF loan has been paid off.
On the other hand, your fund holds the beneficial title to the investment property. It receives rental payments from the property’s tenants, which are used to service the loan over its lifetime. The fund can obtain legal ownership once all the repayments have been made, but this isn’t a requirement. The trustee can go on holding the legal title until which time the fund decides to obtain it.
3. Limited recourse
When your fund takes money out to purchase an investment property, the arrangement is controlled under conditions known as limited recourse borrowing. This means that, if the loan defaults, the lender only has recourse on a single asset.
As a guarantee on the loan, you’ll need to consider whether your SMSF has the necessary cash flow to service repayments and fees. This could rely on any number of factors. For example, think about whether the fund will have sufficient cashflow if a member was to leave.
