What is an SMSF loan?

While many have already heard that a self-managed super fund (SMSF) can help them enrich their investment strategy, too few know exactly how the process works. But it’s an important subject to study, because for those looking to invest their superannuation funds, a SMSF can sometimes be the best manner in which to make real estate purchases. With friendly loan terms and strong asset protection for investors, SMSF have become a very popular manner for making purchases in the real estate market, either commercial or residential.

However before making this decision, it’s essential to be aware of the processes and regulations which govern the nature of investments made under super funds. Because if the circumstances are right, then a SMSF might be ideal and part of the reason for that is because of the highly-beneficial structure of self-managed super fund loans.

Before we get to the loans, what is a self-managed super fund?

A SMSF is a trust set up to include up to four individuals (in a high percentage of cases, a SMSF is established for two members of a married couple). Once the fund is established, it can make investments and receive loans for the sake of real estate purchases, which are then managed by a trustee appointed to the position by members of the fund.

For many investors, the concept of a SMSF offers various upsides. Most importantly, a SMSF can apply for and receive a loan that allows it to purchase or invest in real estate property either commercial or residential, depending on the trust and then have that property held in a separate “bare trust” until the loan has been repaid (once the loan has been repaid, the property is traditionally owned outright by the trust). Another upside is that by this system, individuals are able to invest in property itself, as opposed to investing via equities or other partial forms of ownership.

Individuals and small groups who are looking for ways to invest their superannuation often turn to a SMSF to do so. It can be a hard task, as it puts a great amount of control in the hands of the investors themselves. But for those up to that task, a SMSF can be a great help towards diversifying one’s funds and part of the reason for that is because self managed super fund loans bring with them a number of favourable terms.

What is a self-managed super fund loan, and how does it work?

If you have a SMSF, then you can receive a structured self managed super fund loan which can help you to acquire real estate assets. Once the loan is acquired, the purchase of the property can be made in the name of the bare trustee (with the SMSF paying the deposit, legal costs, and stamp duty, among other fees). After the purchase has been made, the bare trustee mortgages the property to the lender, with the SMSF taking over management of the asset, in the manner of most other real estate investments.

From that point, the SMSF then pays back the loan with a combination of returns from the investment rent, for example as well as with other income from investors, which is typically capped at a fixed percentage. The loans are made specifically for the purchase of specific real estate properties, which are then held by the bare trust until the balance is paid, at which point the title for the property is transferred over to the fund in full.

On a related note, another major upside that comes with investing via a SMSF is that self managed super fund loans are structured as limited recourse borrowing arrangements, also known as LRBAs. What this means is that money borrowed by a SMSF to purchase investment assets can not be held against other assets held by the super fund. In other words, in the case of a loan default, the only asset that would be at risk is the property that was purchased with the loan in the first place not any other properties or assets held by the fund.

To obtain a self managed super fund loan, certain benchmarks do have to be illustrated in advance, usually by the trustee. For instance, to prove serviceability of the loan, the trustee will demonstrate that rental income from the investment property, when combined with other member contributions as well as with ongoing income from other properties held by the SMSF, will be suitable to cover the costs of the property and the loan. Along these same lines, investment properties purchased by a SMSF have to be kept in line with the operations of the overall fund, most importantly with regards to the fund’s investment strategy.

What’s the process for obtaining a self managed super fund loan?

The actual process for obtaining a self managed super fund loan will be familiar to most who have had prior dealings in the real estate industry. Once the trust has been established, and has a bank account set up in its name, then a SMSF may obtain a conditional loan approval on a property. At this point, the bare trust deed and purchase contract will need to be established and executed, and a property valuation will need to be arranged.

Once that’s all done, the SMSF can obtain formal loan approval, at which point mortgage documents can be drawn up. From there, it’s on to the settlement date. So while there are of course notable differences, acquiring a self managed super fund loan is in many ways not too different from obtaining a standard mortgage loan.

What else do I need to know?

As mentioned above, whether or not a SMSF is the right choice for your investments will depend on your circumstances, as well as many other factors. For example, there are many rules which govern borrowing on behalf of a SMSF, which you of course would want to familiarize yourself with before going any further. One such rule is that a SMSF is not authorised to purchase a property from any individual who is related to the trustee of the fund, unless there is a specific allowance which permits them to do so. Traditionally, the properties must be purchased from arm’s-length vendors only. Also, your SMSF investments must be in line with the strategies and risk management procedures outlined at the outset of your fund showing once again that a SMSF is likely best for those with a very clear idea of how they want they want to allocate their investments.

If the general outline of how a SMSF operates sounds like it might align with your own investment strategies, then the next step would be to speak with a specialist lending manager about further details. There is no question that a SMSF is a complex way of approaching super investments, but if it’s right for your own finances, then it may offer terms far superior to other alternatives.

And there are qualified, experienced lending managers who can offer guidance and solutions for those who choose to gain control of their retirement assets with the help of a SMSF. Offering a path that allows borrowers to expand their funds investment while simultaneously protecting their other assets, a self managed super fund loan can sometimes offer benefits matched by few other investment strategies.