One of the most common questions I hear from people exploring property through superannuation is:
“Can my SMSF actually borrow money to buy property?”
The short answer is yes, in certain circumstances.
However, the rules have recently changed, creating an important distinction between residential and commercial property.
A new Limited Recourse Borrowing Arrangement (LRBA) can no longer be used to purchase residential property within an SMSF. An SMSF can still own residential property, it just can’t use a new LRBA to fund the purchase.
Borrowing may still be available for eligible commercial property, provided the transaction meets the relevant legislative and lender requirements. So while the answer may still be yes, the type of property you’re considering matters.
And even when borrowing is available, there’s another question that I think is just as important:
Does borrowing support what you’re actually trying to achieve?
How Does SMSF Property Borrowing Work?
SMSF property lending works differently from borrowing to purchase an investment property personally or through a company or trust.
Where borrowing is permitted, it generally occurs through an LRBA. Without getting too technical, this allows an SMSF to borrow to acquire an eligible asset through a specific legal structure. The limited recourse nature of the arrangement generally restricts the lender’s rights to the property acquired under the LRBA if things go pear shaped.
There are rules around how the structure is established, what the SMSF can purchase and what can happen to the property while the borrowing arrangement remains in place.
There are also lender requirements that sit alongside the legislation. The lending is different. The ownership structure is different. The documentation is different. And there are often more people involved.
What About Commercial Property?
For business owners, commercial property can create some interesting opportunities.
An SMSF may be able to purchase commercial premises and lease them to a related business at market rates, provided the arrangement satisfies the relevant rules.
That might be an office, warehouse, factory, medical suite or other premises used by the business.
But it’s important not to jump too quickly from:
“This is possible.”
to:
“Therefore, I should do it.”
They’re two very different conclusions.
Being Able to Borrow Doesn’t Mean It’s the Right Strategy
A lending approval tells you whether an application meets a lender’s criteria. It doesn’t tell you whether buying the property through your SMSF supports your retirement objectives or is appropriate from a tax or investment perspective. Those are conversations to have with the appropriate members of your advisory team. My role is different. As a lending specialist, I’m looking at whether the finance works and what implications the lending structure may create.
Depending on the lender, property and circumstances, we may need to consider:
- The deposit required
- The SMSF’s available funds
- Cash remaining after settlement
- Rental income and member contributions
- Loan servicing
- The type and location of the property
- Lender-specific requirements
One of the things I pay particular attention to is what happens after settlement.
Having enough money to complete a purchase and having enough to comfortably hold the property can be two very different things.
That’s why the question isn’t always:
“How much can my SMSF borrow?”
Sometimes the better question is:
“What position will the fund be in after the property settles?”
SMSF Property Is a Team Strategy
I often say SMSF property isn’t really a lending strategy.
It’s a team strategy.
Your financial planner may help determine whether the strategy supports your broader retirement objectives.
Your accountant can advise on the accounting and taxation implications.
Your solicitor can advise on the legal structure and documentation.
And my role is to help you understand the lending — what may be possible, what lenders require and how different lending options may affect your flexibility.
Everyone has a different role, but ideally everyone is working towards the same outcome.
So, Can Your SMSF Borrow Money to Buy Property?
Potentially, yes.
A new LRBA can no longer be used to purchase residential property, but borrowing may still be available for eligible commercial property, subject to the relevant legislation, SMSF structure and lender requirements.
Even where borrowing is available, I don’t think the most useful question is simply:
“Can we get the loan?”
I think it’s:
“If this is the strategy we want to pursue, how do we make sure the lending supports it?”
Because finance is simply one piece of the puzzle.
The strategy sets the direction. The details make it work.
Not Sure Where to Start?
If you’re exploring property through your SMSF and you’re not quite sure what you should be thinking about, we created the SMSF Property Strategy Diagnostic to help you step back and look at the bigger picture.
It won’t tell you whether you should or shouldn’t buy property through your SMSF, and it isn’t financial advice. Instead, it can help you identify areas worth exploring and questions you may want to discuss with the right members of your professional advisory team. Because sometimes the most valuable first step isn’t finding an answer.
It’s knowing which questions you need to ask.
General information only. This article does not constitute financial, taxation or legal advice. Before making decisions regarding an SMSF or SMSF property strategy, you should seek advice from appropriately qualified professionals who understand your circumstances.