So much good information on SMSF borrowing in this thread!
I would firstly like to point out that there is some fantastic information contained in this thread - probably a lot more than what is contained on numerous other websites.
Special thanks to Bill (BV) for sharing his experience of buying property with super. Also thanks to others who have contributed such as MikeF, Manoj and euro73 - I know there are others.
As I have been involved in a number of commercial and residential property purchases by SMSFs using borrowings, I thought I would share some useful tips and information for anyone who wants to educate themselves further on the subject.
How much can my SMSF borrow?
I am not a finance broker, however I have found that the maximum LVRs available are 80% for residential property (Westpac) and 70% for commercial property (Laiki Bank). Apparently Laiki Bank is a Greek bank - so who knows where they get their money from
I have a schedule of the available SMSF lenders from a couple of months ago which can be found here:
SMSF Limited Recourse Loan Providers - I know it doesn't contain every single lender - and I have intentionally left some off the schedule.
As mentioned by euro73 earlier, the assessment of serviceability works a little differently with the SMSF loans (good work on the example calculations too
).
I have come across the following calculator from St George which I have found useful to see whether the serviceability aspects of a potential SMSF loan can be met:
St George Super Fund Loan Calculator (excel with macros)
I am not saying St George is the best SMSF loan provider - I simply have found the loan calculator useful.
Now - just because your SMSF
can borrow a certain amount - doesn't mean it should. If you can purchase a property in your SMSF with a level of gearing which enables the property to be close to neutral cash flow, then as mentioned by BV any employer contributions / 9% SGC and salary sacrifice can be accumulated and used for future SMSF property purchases.
Member-financed loans
It is always good to use other peoples money to build your investments - but of course doing so comes at a cost - and with SMSF limited recourse loans there is often additional costs (both upfront and ongoing).
One way to reduce these costs is to utilise other external equity, obtain a separate loan / LOC and on-lend to the SMSF (all the same documentation still required).
A strategy which I don't think has been mentioned is the use of a bank limited recourse loan combined with a second member-financed limited recourse loan. In this situation the second lender (say a member or a family trust) cannot take any security or charge over the underlying property.
This strategy I believe is especially attractive to investors and long way from retirement who may have money outside of super, as it enables them to inject some additional capital into the SMSF at the time of purchase - but that capital can be repaid back to them by the SMSF at a later time. I like to think of it as the best of both worlds - tax effective investment (via super) without 100% of the capital being tied up until age 55 plus.
Buying in super vs. negative gearing?
Is
buying property with super better than negative gearing?
The two strategies are not mutually exclusive - in fact I believe they can actually compliment one another nicely.
Higher income earners often have higher super balances - so they are more likely to be able to simultaneously buy property with their super tax effectively while negatively gear in their own names with other properties.
Also (as BV hinted) if the SMSF property has negative taxable income as a result of depreciation and capital works deductions, a high income member of a SMSF can obtain significant tax savings via salary sacrificing - they just need to be careful that they do not exceed the contribution caps - especially if they are under age 50.
Other points:
- Getting the right advice is essential - you will need a good accountant and finance broker who know what they are doing.
- What is the deal with the CBA SuperGear product? It was almost as if they felt obliged to bring out a SMSF loan product, but then decided to make it so convoluted, restrictive and impractical that no one would want to use it!
- What are the common mistakes people make when buying via their SMSF with borrowings?
Firstly I would say that they don't ensure the cash flow generated from the property is enough to cover loan repayments and other costs - so they are depending on the ability for contributions to cover the shortfall - which is not ideal.
Secondly is either signing a contract in a different name and trying to change it to the holding trust (trustee company) later on or simply not leaving enough time under the contract for finance approval.
- Using a SMSF to borrow to buy property is generally going to be more expensive than doing it in your own name - but if done correctly can provide huge benefits including tax savings, asset protection and the ability to access current super to help build a property portfolio.
Apologies for the length of this post - I hope this additional information is helpful and doesn't cover anything already discussed in the thread.
I suggest if you have any questions about SMSF borrowing - please ask them! There are many people who will be willing to answered them.
Kris_Evolved