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Benefits of Borrowing for SMSF Property Investment

A self-managed super fund (SMSF) property investment is currently a popular investment option for individuals or groups running an SMSF. This investment option allows the SMSF trustees to invest in residential or commercial properties and achieve the benefits that go with it. 

Furthermore, an SMSF property investment is considered a tax-advantaged way to invest in property. This is because, by setting up an SMSF and borrowing to purchase a property, you can potentially save on taxes and earn higher returns. However, to maximise the tax benefits, you need to hire the service of an SMSF accountant to help you set up your SMSF. 

Is Borrowing for SMSF Property Investment Worth It?

There are many reasons why borrowing to invest in property through your SMSF can be a smart move. However, the most common reasons why doing such is a wise decision are the following:

• Helps You Spread Your Investment Risk and Diversify Your Portfolio.

Using SMSF, investing in different property types can mitigate the risks associated with any particular market or asset class. Doing this allows you to spread your investment risk and diversify your portfolio. As such, you are not relying on a single asset class for your retirement savings.

• Leverage Can Magnify the Returns on Your Investment.

If the property you purchase goes up in value, you will make a more significant return on your investment than if you had purchased the property outright.

• Tax Advantages Can Make Borrowing to Invest in Property Through Your SMSF Even More Attractive.

The interest payments on your loan are tax deductible. If you work with a good SMSF accountant, you will most likely pay less taxes on your investment income. 

• Borrowing Through Your SMSF Can Give You the Flexibility to Buy Property Sooner.

This can be especially beneficial if you want to take advantage of a perfect opportunity or market conditions. By borrowing money, you can purchase a property that will immediately provide your SMSF with more income.

Suppose you are considering borrowing to invest in property through your SMSF. In that case, speaking to a qualified SMSF accountant or financial advisor is important to get expert advice on structuring your loan and investment. They can also help you to understand the risks associated with this strategy.

Why Should You Not Buy Property in SMSF?

Buying a property in SMSF comes with various benefits and risks. This is why you should weigh the existing pros and cons before deciding on purchasing a property. Also, it is equally helpful to consider the following during the decision making.

• The Fund Might Lack Liquidity

Buying a property in SMSF exposes the fund to liquidity risk. Due to the purchase, there is a possibility that you will not have an ample amount of liquid assets to fund some of your cash flow needs. Thus, the SMSF trustees and decision makers need to examine their current financial circumstances before buying a property. It is also helpful if you will hire the service of an SMSF accountant or a financial expert.

The Property Can’t Be Used as Security When Getting a Loan.

Many SMSF accountants won’t advise you to buy a property in SMSF because you cannot use that property as a form of security when applying for a loan. As a result, you will most likely have a hard time looking for collateral for the loan, as well as getting the financing you need.

• You Can’t Live or Use the Property

Another disadvantage that a SMSF accountant or a financial expert will provide to persuade you not to buy a property in SMSF is that you cannot use or live in the property that will be purchased. Not only that, the applicable laws governing SMSF also prohibit your relatives, the other trustees and their relatives from using the property. 

So, if the purchased property will have no tenant, you have no other option but to wait for one to come. You can also sell the property, but you should ensure that doing this will not violate any guidelines that must be strictly followed when handling an SMSF. 

• The Loan Used to Acquire the Property Is Costly

Getting a loan that you can use to buy a property through SMSF is not as easy as getting an ordinary loan. This is because the SMSF setup is different and comes with another set of requirements and higher interest rates. In addition, most of the loans offered for this setup involve many upfront costs. Thus, it pays to have a SMSF accountant or a financial expert to help you secure the best loan.

How Much Can My SMSF Borrow for Property?

The maximum amount an SMSF can borrow from lenders to purchase a property is not always the same. This is because every lender has a different lending policy that determines the highest loan amount they provide.

However, most loan providers, especially banks, are willing to lend the amount equivalent to 70%–80% of the property that the SMSF is planning to use. This type of loan is not the same as ordinary loans, so it is best to seek the advice of a financial expert or a SMSF accountant before taking out a loan. It is also equally important to secure a loan from a reputable lender to ensure you’ll get the best deals.

How Malkoun & Associates Can Help You

Dealing with everything that involves SMSF is complicated. This is why you should consider getting the service of a financial expert who will help you in the decision making, as well as ensure that all your transactions adhere to the guidelines governing SMSF.

If you want to succeed in your SMSF investment activities, get an SMSF accountant from a reputable company like us Malkoun & Associates. Our firm employs a team of experienced and expert SMSF accountants who specialise in SMSF. As such, you’ll have peace of mind knowing that the advice you need is within reach. Contact us today.