Self Managed Super Funds : Borrowing to Buy

The Members or Trustees of DIY or Self Managed Super Funds (SMSF), who are considering direct property investment in the residential housing market, now have a window of opportunity to borrow up to 70% of the purchase price to acquire a house or apartment subject to certain criteria. The appeal in this sector of the property market is, for most people, a clear & predominately transparent understanding of property values, occupancy rates and rental returns in their particular geographically area of interest.

It works like this:

SMSF                     Bank                      Security Trust                    Property

Deposit                 Lender                   Mortgage/                         Valuation

$150K                    $350K                    Guarantee                          $500K

SMSF has a $150k deposit, borrows from the Bank via a Security Trust the $350K balance & the Security Trust provides a guarantee and mortgage over the property for the SMSF that has a beneficial ownership interest in the acquired property.

The Benefits are:

Trust interest and expenses can be claimed against Rental Income. SMSF are entitled to net returns and Net Capital Gains at Zero to 15% tax rates. SGL and Salary Sacrifice Contributions can reduce the Bank mortgage. The other SMSF assets are secure as the lenders recourse is limited to the Security Trust and any possible guarantor.

Points to remember:

Regulatory control remains operative in that the SMSF must remain a complying fund. The sole purpose test must be followed and that you or say a relative cannot live in or benefit from the property until retirement.  The arrangement must also be on an arm’s length basis and consistent with the SMSF Deed, investment strategy and have sufficient cash flow to service the loan repayments.

Incidentally, if you don’t have your own SMSF you may be able to Roll Over your super into your own tailored Super Fund. However, professional advice is strongly recommended beforehand.

The benefits of additional residential property ownership are many. Compared to the flashing light advertising of public share funds and share market volatility due to the GFC, perhaps the slow and steady returns of the residential property market via this borrowing facility, within the control of your own SMSF, will help you pass the sleep test when it comes to your Superannuation Retirement Investment.