SMSF Property Finance - What is it?

As with traditional financing sources, there is no one size fits all product or financing strategy, as various SMSF mortgage products, credit policies and client needs differ significantly.

SMSF mortgages are a unique lending facility that allows approved applicants to use their SMSF to borrow and invest in certain eligible real property assets including commercial offices, factories, shops, showrooms, warehouses and ‘approved’ residential properties.

The process simply requires you to have or to establish a compliant SMSF, identify an appropriate property to buy and apply for your SMSF mortgage loan.

Once your loan is approved, the property you have identified is purchased by a trust with your SMSF having a beneficial entitlement to the property. The trust leases the property to either your own business, or another business (or an arms length residential tenant), earning an ongoing rental income. Rent is paid to a rent account established in the name of trust.

This income is used to repay the loan as well as pay any costs associated with the property.  Once the loan is repaid, the trust may transfer ownership of the property to your SMSF.

Superannuation & Property

It might not be top of the office party chat list just yet, but superannuation returns post GFC is rapidly becoming the hot topic for superannuation savers.

As world share markets continue to demonstrate significant & protracted volatility, super fund members and SMSF trustees are finally switching on to the fact that there is a need to continually assess and take control of their retirement savings destiny.

Choice of investment options can mean the difference between tens of thousands of dollars come retirement time, however, it can also mean the difference between peace of mind or stress about plunging super balances.

For superannuants, the option to include real property assets in their super portfolio is a very desirable outcome, however without the option to borrow funds to acquire property, super investors have largely had to limit themselves to more volatile growth assets.

Australians have always had a love affair with property & for good reason. Property offers the opportunity for solid capital growth as well as reasonably consistent income yields.

With the changes to the SIS Act in 2007, property is set to become a significant feature in many SMSF portfolios for the future.

What are the benefits?

SMSF mortgages are a tax-effective way to buy property.

Borrowing to invest in property provides the potential to utilise gearing strategies using superannuation to generate tax-effective income for the SMSF.

Holding property in a SMSF may also allow you to defer any capital gains until retirement, at which stage they become tax free.

SMSF mortgages let you diversify the assets in your SMSF. The ability to borrow to buy ‘direct’ property provides the opportunity to diversify your overall SMSF portfolio by including property which previously has been difficult to access, without significant available equity.

In other words, more can be achieved with SMSF borrowing, in terms of leveraging into ‘larger’ real property assets.

Further, a geared property investment in an SMSF, essentially magnifies the fund balance as the fund now includes the value of the asset being geared . As such, earnings within the fund will be reflective of the overall asset bases value.