Investing Your Super Fund In Real Estate

Investing with your SMSF

If you have a self-managed super fund in place, it shows that you have the motivation to take control of your own financial future by determining exactly how your investments are allocated.

 

What is a SMSF?

A self-managed super fund (SMSF) is a trust designed to provide retirement income for its members. It must have a Tax File Number (TFN) and an ABN, as well as a bank account.

The primary difference between other types of trust and a SMSF is that the trustees are also the members of the fund. A SMSF can have up to four members.

The trustees run the trust for their own benefit, selecting the structure and investments that they believe will most effectively achieve their goals.

 

 

Buying property with a SMSF

One of the ways that you can invest your SMSF is by purchasing a property.

Types of property that you can purchase include:

  • Residential property
  • Commercial property
  • Industrial property
  • ·Farming land (in some situations).

The sole purpose of the property purchase must be to support the SMSF investment strategy to build wealth for retirement.

There are restrictions around the property that you purchase – you or a family member can’t live in the property or benefit from it.

 

Commercial property purchase with SMSF

You can purchase a commercial property to lease back through your business, when you meet the legislative requirements.

This can be a favourable arrangement for small business owners, who can take advantage of the reduced tax on the purchase as well as the convenience of a stable commercial premises.

The terms of the lease must be commercially competitive, and you won’t be able to take a ‘repayment holiday’ if your income drops. You’ll also need regular valuations on the property, and the purchase must satisfy the “sole purpose” test to build wealth towards the members retirement.

 

Don’t have enough money in your super trust fund?

To purchase a property using a SMSF, you can either borrow the funds using an LRBA, similar to a mortgage, or you can opt to purchase as Tenants in Common. 

Using a Tenants in Common arrangement you can split the property purchase costs between your super fund and your family home.

 

Limited Recourse Borrowing Arrangements (LRBA)

An LRBA is the only way you can borrow long term funds using your SMSF. A separate property trust and trustee is established outside the SMSF to hold the property.

How does an LRBA work?

  1. The property is purchased under a specific trust.
  2. The SMSF pays the loan repayments and handles all of the income and expenses for the property.
  3. If loan payments are not met, the lender can only seek repayment of the loan from the property purchased. The lender cannot access the other assets in the SMSF.

You can usually borrow up to 70-80% of the value of the property through an LRBA, but you’ll often need to have a minimum balance in the fund, as well as meeting a minimum annual contribution, to be approved for an LRBA property loan.

The loan repayments can be funded through rental income or member contributions directed to the SMSF account.

 

Setting up a SMSF for property purchase

When you set up a SMSF you must have enough time to manage the fund. A good team of financial and legal advisers will help you avoid any pitfalls too.

Once your SMSF is set up, you’ll need to consider if purchasing a property is in the best interests of the members of the trust.

Be sure to seek qualified, independent advice before you set up an SMSF.

Article provided by Positive Lending Solutions

 

Source:  https://homesales.com.au/