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What Is SMSF Borrowing for Real Estate Investment?

In preparation for your future retirement, you must save money as early as today. Most people put their retirement savings into a retail or industry super fund.

Retail or industry super funds are managed by financial institutions like banks or investment companies. When you become a saver member, you agree that the institution will have full control over how it will use your money to generate a return of investment. They may use your money and the other saver members’ money to invest in a property or a business.

Did you know that you can do it yourself? Through SMSF, you and five others can be trustees of your very own super funds and have full control over where and how you are going to invest them. For instance, you can get an SMSF loan for a real estate investment.

If you are interested to know how SMSF borrowing works for real estate investment, read on and learn about its features.


What Is SMSF?

Self-managed super fund (SMSF) is a super fund privately managed by yourself. SMSF can only have a maximum of six members, including yourself. The members of an SMSF also become the trustees of the super funds.

SMSF works similarly to retail or industry super funds. Whatever money you used to put in a retail or industry super fund, you can also put in your SMSF. The difference is that you can choose the investment and the insurance of your funds. All members or trustees of an SMSF are responsible for all the money management and compliance with the law, particularly the tax law.

The main goal of an SMSF is to save and generate money for the future retirement benefits of its members.


What Is SMSF Borrowing?

SMSF borrowing takes place when the trustees borrow money from a third-party institution like a bank or private lenders to use for investment or other purposes. SMSF borrowing is only possible under limited circumstances, which include:

  • The amount to be borrowed shall not exceed 10% of the total asset of your SMSF.
  • You can only borrow money for a maximum of 90 days to meet benefit payments due to members and a maximum of seven days if you are borrowing to cover security transactions.
  • SMSF borrowing is only possible under the conditions of Limited Recourse Borrowing Arrangement (LRBA).

Before entering into any conditions for SMSF borrowing, it is important to consult a professional. Ask the advice of an SMSF accountant to fully understand how SMSF borrowing works.

How Does SMSF Borrowing Work for Real Estate Investment?

SMSF borrowing for real estate investment works under LRBA conditions. LRBA allows SMSF to acquire property or shares using borrowed money. Under LRBA conditions, the recourse of the lender is only limited to the property or shares acquired through borrowed money and not on any other private assets and properties of the SMSF.

SMSF borrowings for real estate investment typically have up to 20-year terms. During the term, the SMSF has two options to do about the property. It can either pay the borrowing fully and take full ownership of the property or it can sell the property during the term, repay the borrowing and keep the remaining amount as additional funds. 


Other Uses of SMSF Borrowing

Aside from real estate investments, SMSF borrowing can also be used for other purposes, such as:

  • Meeting the member’s benefit payments
  • Covering security, insurance and tax transactions
  • Meeting outstanding surcharge liabilities
  • Investing other assets under SIS regulations.


Requirements and Eligibility Requirements of an SMSF Borrowing

Before you can get approved for an SMSF borrowing from a third-party provider, you need to secure all needed documentary and eligibility requirements. 

• List of Documentary Requirements for SMSF Borrowing

      • Certified copies of SMSF Trust Deed and Custodian Trust Deed
      • Financial information of the SMSF like audited financial statements, bank statements and rental estimates
  • A full copy of the contract of sale

• Eligibility Requirements for SMSF Borrowing

    • The SMSF was established at least three years.
    • The SMSF shall have no outstanding loans from other lending institutions.


Fees of an SMSF Borrowing for Real Estate Investment

When getting an SMSF loan, you must also consider the fees that come with it. All the fees will automatically be handled by your SMSF funds and total assets. Therefore, you must have enough funds in your SMSF.

The fees of an SMSF borrowing when used for real estate investment include:

  • Upfront fees
  • Legal fees
  • Advice fees
  • Stamp duty
  • Ongoing property management fees
  • Bank fees.


Possible Risks of SMSF Borrowings

All loans, including SMSF borrowing, come with risks. Knowing these risks beforehand will help you decide and plan how you are going to handle them.

The risks of an SMSF borrowing include:

  • Higher costs—Compared to other property loans, SMSF borrowing tends to be more expensive. 
  • Cash flow—You need to make sure that the SMSF always has a continuous cash flow to ensure enough funds for the repayment of the SMSF borrowing.
  • Difficult cancellation—Once you are approved for a loan, it is difficult for you to get out even when you have encountered problems on the property itself.
  • Possible tax losses—The property acquired from SMSF borrowing has its taxes to be paid and the tax losses cannot be offset from your income outside the fund.
  • No alterations to the property—Changes and refurbishments can’t be made for the property until the loan is paid off.

Who Should You Consult About SMSF Borrowing?

When it comes to SMSF, SMSF borrowing and other accounting and tax services, consult Malkoun & Associates. We are the best and most trusted financial advisor in Australia.

With the help of our experienced SMSF accountants, the best accountants in Sydney, you are going to understand the best strategies for running your SMSF. You will also have a smooth and safe experience when it comes to your SMSF borrowing.


How Malkoun & Associates Can Help You

You can manage and grow your retirement benefits through SMSF. SMSF borrowing can also be a key for you to have benefits higher than what you have saved because of all the investments it will bring in your SMSF. 

For SMSF, SMSF borrowing and all things super, trust only the advice of the best in the field. Trust Malkoun & Associates. Contact us now and let us talk about your future finances.