Buying property with your Superannuation
How does it work?
In the past buying direct residential property inside of your superannuation has been out of reach for most Australians, due to the costs associated and the high entry level to buy just an average Australian property. To buy just one residential investment property in most states in Australia, the costs are going to be well over $400,000. Therefore, in the past you have had to have at least $400,000 inside of your super fund to buy just one property, let alone all of the transactions associated costs such as stamp duty ect.
Since 2007 the Superannuation rules have been changed to allow you to borrow money inside of a SMSF to purchase both residential and commercial property. Now that you can borrow money through your own Self Managed Superannuation Fund (SMSF) to buy residential investment properties. For residential investment property banks are willing to lend up to 80% of the value of the property. For commercial property the banks are willing to lend up to 70%.
SMSF Borrowing Rules
The process in which you gain approval for a SMSF investment property loan is a lot different to obtaining a regular property loan in your own name, as any borrowing arrangements inside of super will need to comply with the SIS Act.
To meet these borrowing rules, a SMSF can only borrow to invest in direct property through a different structure called a Bare Trust (also known as a Property Trust or Custodian Trust). Although the legal title will rest with the Bare Trust, the SMSF maintains the beneficial ownership of the property, meaning the SMSF will receive all of the rental income and capital gains made by the investment property. The purpose of this arrangement is so that the lender can take charge of the property if the SMSF fails to meet the interest obligations and pay off the loan.
How does my SMSF borrow money to purchase an investment property?
You find and choose the investment property you wish to purchase, in the usual way (as homework, open house etc.). Residential property must be purchased from an arm’s length vendor. Commercial property can be purchased from “related vendors” so long as the property is let for business purposes and the purchase price is at full market valuation.
The SMSF obtains a loan approval. The lender then follows its usual credit criteria and approval loan process. The loan will be in the name of the SMSF. On completion of the purchase, the SMSF borrows from the lender and charges its beneficial interest in the property to the lender. The Property Trustee mortgages the legal title to the property to the lender. The SMSF then manages the asset in the same way as an individual or company would manage any other real estate investment.
When you have the right team of specialists looking after you and advising you this can be very simple to deal with.
For more information on Self Managed Super Funds and what the process is contact one of our Finance consultants today.