If you are seeking to purchase an investment property with your self-managed super fund (SMSF), you should be aware of the terms associated with borrowing before devising a strategy.
The borrowing terms are much stricter within a super fund due to the superannuation rules referred to as Limited Recourse Borrowing Arrangements (LRBA). The first requirement of borrowing through an SMSF is that you cannot buy several properties under the one borrowing arrangement. Instead, it must be one single acquirable asset.
In addition, an asset purchased through an SMSF with an outstanding loan remaining cannot borrow money to “improve” the property such as significant renovation plans. Also, the legal ownership of the asset is held in a separate holding trust until the loan is repaid. This ensures the other retirement investments in the SMSF are not placed at risk.
Those investors using SMSFs have flexibility when it comes to choosing a lender. A loan can be obtained from your business, family member, or a bank or lending institution, although if using a bank or lending institution you may be subject to high fees. It is important to consider cash flow beforehand as loan repayments must be made from your SMSF, requiring sufficient funds.
Overall, choosing your SMSF to purchase investment property can be a viable financial channel. However, investors should be aware of the constraints and complexities of this investment strategy.