Investing in property has become an ongoing trend among many Australians since it generally provides stable and reliable income streams and it helps in “the fight” against inflation. In the past, Australians have invested in property outside of super using a traditional investment loan, however in the last few years we’ve changed the way of “financial thinking” a lot and we’ve turned to super funds to help us when we need them the most.
Relying on SMSF borrowing to buy property can be a simple and effective strategy to leverage your existing superannuation, but as a trustee you must be familiar with all the hidden traps in order to avoid negative consequences. You have to make sure you don’t accidentally create some circumstances that could put all your retirements at risk, that’s why informing yourself before using SMSF borrowing to buy property is the key to a successful investment.
Borrowing for a property investment with the SMSF must be done through a limited recourse borrowing arrangement or the LRBA. The LRBA is a type of loan structure where the only SMSF asset where the lender has access to is the asset that was purchased using the loan. These arrangements involve establishing a security trustee to legally hold the asset on behalf of the SMSF. In the majority of situations, the LRBA is used to purchase property, although it can also be used to purchase direct shares or managed funds.
Before considering purchasing a property within your SMSF, you should consider many things. Firstly, you must ensure that the arrangement fits within your investment strategy and most importantly, you should definitely seek professional advice from a lawyer or a financial adviser specialized in SMSF and LRBA.
You have to make sure your SMSF trust deed allows your fund to borrow and buy property before considering to set up a holding trust and selecting the property. Once you’ve checked that, you ought to become familiar with some of the regulations between the SMSF and the LRBA. Namely, it’s important to note that the SMSF can’t use the LRBA to improve an already purchased asset, although the borrowed money can be used to maintain or repair an asset.
Fund trustees who are considering gearing investments for the first time should be especially careful when making this huge step, so getting prepared and informed properly is a must. Any professional advice you can get is of a paramount importance, so make sure you find the best financial advisers and lawyers that you can get and start working on your investment.