It is very important to understand that you need time and skills before you commit to make a SMSF. It is an important financial decision which needs to be discussed with the experts including your accountants and financial advisers.
It must be kept in mind that the SMSF is setup for retirement benefits of the members and their dependants.
As the trend suggests, a lot of people are choosing to setup their own SMSF’s and buy a property in it. It is advisable to discuss and plan with a financial advisor before you setup a SMSF.
SMSF property rules:
The SMSF property must:
- Be setup for solely providing retirement benefits to fund members.
- Should not be acquired from a related party of a member.
- Fund members and related parties cannot live in the property.
If your SMSF purchases a commercial property, it can be leased to a fund member for their business. However, it must be leased at the market rate and follow specific rules.
SMSF Borrowing capacity:
To determine the borrowing capacity of a SMSF, a different calculator is used instead of the normal borrowing capacity calculator. Usually, the income and expenses of the SMSF are used to determine the borrowing capacity of the SMSF. Usually, contributions from the employer and voluntary contributions over a period of 2 years are used to determine the borrowing capacity. Along with rental income or expected rental income it forms the basis of the income of SMSF. Most lenders will at least need 20% deposit plus all other expenses including stamp duty etc before they lend to buy a property in SMSF. Also keep in mind that the interest rates are usually higher for SMSF loans in comparison to normal investment property loans.
Different lenders will have different requirements, though you should expect the following documents:
- 6 months bank statement of SMSF.
- New SMSF’s looking to borrow will usually require 2 years super statements from the members of SMSF’s.
- Evidence of rental income or appraisal during valuation.
- Certified copies of the trust deed and property deed.
- Some lenders will require independent advice and have more formalities.
How SMSF loan works?
For SMSF loans, banks and lenders have a limited recourse in event of default. The lenders can only claim against the property they have lent to SMSF and cannot use other assets to recover money.
Usually, a bare trust is formed which holds the property. The trustees are usually the SMSF members. The rent goes in the SMSF bank account, and the instalments are deducted from the same account. Once the loan is repaid, the property is transferred to SMSF. Each property within the same SMSF will require a separate bare trust.
SMSF Cash out
It is very important to understand that equity cannot be withdrawn from the SMSF property as per legislation. So, members cannot withdraw equity to purchase another property and use it as deposit.
It is very important to know that while you can make normal repairs and maintenance on the SMSF property, you are not allowed to make any major changes such as home extensions etc.