SMSF Limited Recourse Borrowing Questions
A limited recourse borrowing arrangement requires an SMSF trustee to take out a loan from a third party lender. The trustee then uses the loaned funds to purchase a single asset (or collection of identical assets that have the same market value) to be held in a separate trust.
Any investment returns earned from the asset go to the SMSF trustee.
If the loan defaults, the lender’s rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF.
How does my SMSF purchase a property?
- The SMSF obtains a pre-approval for a SMSF Loan
- The SMSF selects the property it wishes to purchase
- Residential property must be purchased at arm’s length from a non-related vendor
- Business real property can be purchased for full value from related parties so long as the property is leased back for business purposes
- The SMSF establishes a Bare Trust in accordance with the required compliant structure
- The SMSF’s lawyer or conveyancer acts on the purchase in the ordinary way
- The SMSF pays the deposit, the balance purchase money (less the amount borrowed), the legal costs, and stamp duty in the ordinary way
- On completion of the purchase the Bare Trustee mortgages the property to the lender
- The SMSF then manages the asset in the same way as you would with any other real estate investment
Who pays what and when?
As the beneficial owner of the property and the borrower of the loan, the SMSF is responsible to pay all the usual amounts that you would expect to if you had bought an investment property and borrowed money on it in your own name rather than your SMSF. For example, your SMSF will be required to pay;
- Council rates, water rates, and land tax (if any)
- Interest and other loan repayments
- Lenders fees
- Repairs property management costs; and
- Any insurance premiums & management fees imposed by the Property Trustee
Can I occupy the property?
- You cannot occupy residential property. If a member of the SMSF occupies the property the “in-house asset rule” would be breached. However, the SMSF can buy a property that the investor intends to live in after retirement. This is possible if you transfer the property from your SMSF to yourself after you retire.
- Related entities of the SMSF can “occupy” commercial property owned by the fund as long as it is on normal commercial terms.
Is limited recourse borrowing right for your SMSF?
If you already have an SMSF and are thinking of using limited recourse borrowing to make an investment, you need to consider if this is the right kind of investment for your SMSF.
As with any investment decision, evaluate exactly what you are being offered. Some questions you might ask include:
- Who will be the lender and what will happen if borrowing rates reduce or rise?
- Can the loan be called in early?
- Can your loan be sold to another party and the terms of the loan altered?
Limited recourse borrowing arrangements are generally long term investments. Consider whether your SMSF will be able to maintain the loan repayment and fees over the long term.
Will your SMSF have enough money left over to pay the other expenses of the fund such as accountant and auditor fees? Also consider what would happen if one of the SMSF members wants to leave the fund or retire and take their money out or start a pension? Will the SMSF have enough money available or will the asset purchased with the loan have to be sold? Can the loan asset be sold quickly?
Central Coast Mortgage Brokers
Yvonne Ratcliffe from Central Coast Mortgage Brokers Pty Ltd can access all of the market and advise you on the best SMSF loan products available. The choice is yours!
Yvonne will help you purchase an investment property for your SMSF or to refinance an existing SIS Act compliant investment property loan. Phone Yvonne today on 02 4393 1945 or email firstname.lastname@example.org or visit the website – www.mortgagebrokerscentralcoast.com