Property Investment Tips: How to use your super to buy property

By the resi financial blog team, 05 February 2015

Property Investment Tips: How to use your super to buy property

A lot of people like the freedom that a self managed super fund (SMSF) offers, allowing them to protect and manage their money for retirement. Recent changes to legislation mean that it can now be a very tax effective way to purchase an investment property, giving your super an extra boost. Here are a list of steps that can help you invest in property using you super fund. 

Limited recourse borrowing

As with any loan, before you approach a lender the fund must have enough for a deposit on the preferred property. If the balance is sufficient, the fund can now make a contribution and borrow the remaining amount.

There is a specific condition for lending through a SMSF called limited recourse borrowing, which means that any recourse the lender has is limited to that single asset.

For this reason the lender will normally require a guarantee that the fund has sufficient enough cash flow to service the loan - without it, they aren't likely to approve the application.

Before gearing your SMSF into investment property, review whether it is in accordance with your investment strategy. This sets out your fund's investment objectives and how you plan to achieve them.

Asset must be purchased at an arm's length

Once the loan has been approved there are a number of other stipulations that the property must meet. The primary rule is that any asset must be bought at 'arm's length', which stipulates that the transaction has to be made with a person with whom the fund has no relationship whatsoever - no exceptions.

Under these regulations the fund can not collect rent from a property leased by any person associated with you or another member; you also can not sell your own house to the fund. 

Be aware that your fund's investment are for the sole purpose of providing support to members or members' dependents - if it doesn't comply with this test, you risk being taxed at a higher rate. 

The legal title must be held bare trust 

When the fund purchases an asset, a separate trustee holds the legal title until the loan is paid off in full. In the meantime, the SMSF has beneficial title to the property - it will still receive rent payments from the tenant, which balances the interest paid on the SMSF loan. 

While not obligatory, once the loan is wholly settled the fund now has legal right to own it by collecting the legal title from the separate trustee.

If you want to know more about using your SMSF to invest in property, or have questions about whether this strategy is right for you, contact the loan specialists at resi to find out more.

Categories: Property Investment