structuring property loans

Hi Cath

You can use funds in your SMSF for the deposit and then borrow directly from a bank. You can also borrow in your own name and then on-lend the funds to the super fund as a related party loan. The interest rates and terms are different between the two options. It can get quite complex legally as you  will need to have a holding trust sctructure in place between the lender and the SMSF so other super assets are protected in case of default. This requires legal advice and the use of an experienced SMSF adviser. You need to take into account other issues like ensuring enough cash is in the super fund to cover expenses, retirement planning and investment strategy of the fund.
I have an SMSF adviser on one side of me and a lending expert on the other who would be happy to discuss these issues in more detail with you. My email is [email protected]

Good luck
Ben Fox

Hi Cath,

The previous comments are on the right track.

You can utilise the monies in your SMSF as the deposit on an investment property – and it is a superb strategy if you have support from people who know what they are doing in terms of the structure and getting the loan across the line.

What you really need to know is that in general, your SMSF cannot borrow. 

However, one of the exceptions to the rule is when a 'limited recourse loan' and an 'instalment warrant' structure is utilised.  As Ben mentioned you also need an intermediary trust (typically with a NEW company as trustee) which holds the title of the property.

You don't need to know in detail about all the technicalities around how it works – however as trustee (director of the corporate trustee of your SMSF) you do need to have a basic understanding about how all the pieces fit together. Unfortunately no written explanation of diagrams can easily explain it – but I have recorded a short video / animation which does give an overview of how it all work. 

You can find it here: http://www.evolvemysuper.com.au/strategies/borrowing/how-to-buy-property-with-your-super-video-overview/
It is also on Youtube here (you can make it higher resolution which makes it easier to read).

***Apologies is the video comes across as amateurish – I focussed on the quality of the content rather that flashy production values***

I have also posted a lot of notes that provide more information that was not included in the video underneath on my blog (the first link – above).

For more information I have also shared a really good podcast / audio interview from Lee Woodward from the Real Estate Academy here http://www.evolvemysuper.com.au/strategies/podcast-interview-purchasing-investment-property-in-your-smsf/

Both the video and the audio interview / podcast are in plain English and not too technical.

Obviously using your current superannuation as the deposit on an investment property (or two or three) is a great strategy for many investors – simply because you don't need to do the hard yards saving a deposit – you probably already have it! 

But this big advantage comes with a some small disadvantages you have to be aware of:

– it will cost you more – you already have a SMSF with a corporate trustee – which is good, but the set up of the trust and trustee to hold the title of the property will cost you, and as previously mentioned the loan rates normally have a small premium on them

– you can't re-borrow against increases in value/equity – you need to physically sell the property to realise the gains to re-invest to get the snowball effect happening

A couple of tips (I have been involved with a number of these loans):

– cash (flow) is always king – but more so with SMSF loans / instalment warrant arrangements – ideally you want any geared property within your SMSF to be cash flow positive to enable it to look after itself without having to be dependant on extra cash coming in from contributions etc

– you need to have insurances – not just on the property – but on yourself and other members of the super fund – so if you need to payout any disability or life insurances you are not forced to sell the property for whatever you can get for it in a fire sale.  It will also be looked at as part of the loan application for the SMSF – so it works in your favour having some insurance cover.

– don't borrow too much – this kinda relates to my first tip, but it is important so I thought I would repeat it!

– you can refinance in the future – and more lenders are starting to bring out these types of loans

– the strategy of using your super to buy investment property is not mutually exclusive with other property investment strategies – you can do property inside super and outside at the same time!

At the start, when looking at obtaining a loan for your SMSF it can seem overwhelming – but honestly, once you get your head around it and all the tax advantages that come with it (short term and long term) it is a fantastic wealth creation strategy.

If you (or anyone else) has any questions about SMSF loan / instalment warrants please post your questions – myself and other members of the forum would be happy to answer them.

Apologies for the blatant self-promotion of my blog – I just felt it was the easiest way to answer the questions!

Thanks and good luck
Evolve

(I am also in the process of writing an instructional / 'how to' ebook on this subject – to be informed when it is available for download please sign up for my email newsletter by clicking here).