SMSF trustee is Bank-boozled

I am buying a property in my SMSF.
My SMSF has a corporate trustee and I am the director and sole member.
The SMSF is to contribute $100k toward a $380k purchase.
Most of the advice on how to proceed involves setting up a corporate trustee for a bare trust to act as security guardian of the purchased property.
Somehow under this "installment" structure the SMSF is deemed to have bought the property.
Lending from banks under this arrangement is borderline ursury.
There is a lot of drama and angst that the bank can only issue a limited recourse loan to a SMSF. However the banks still want the director of the security custodian (me) to provide additional guarantee on the loan, so really, they have their arses covered well.
I have been quoted a $1800 application fee, almost 10% interest and a 65-70% LVR (and there it is likely the valuation will be low, to further protect the banks position, to do the above purchase for the SMSF.
HOWEVER, If I buy the same property in a $2 company and discretionary trust structure - suddenly the angst about limited recourse evaporates.
The deal them becomes a $600 application, ~7% interest and an 80% LVR.

HUH?

Now - why cant I just do the deal in the $2 company and discretionary trust and then instigate a loan arrangement between the corporate trustee of the borrowing entity and the corporate trustee of the SMSF?
The SMSF does not have to borrow from the bank. It can borrow from anyone.
So - what am I missing or not understanding here?
Surely as SMSF Trustee I want the best deal for my fund - which is lower application fees, lower interest and higher LVR?
At the end of the line is lil old me anyway, so under either scenario, if it all goes to excrement, the Bank comes after me as the guarantor under both arrangements - so what the ????

I mean - really - where is the risk?? I am borrowing $280k, the property will be rented at about $450pw; there is my 9% employer contribution on about $80k and I can salary sacrifice say another $100 or even $200pw into the deal.

If I loose my job AND loose a tenant - well that can happen whether it is SMSF owned or not - and despite the terror of the non-recourse loan, the bank still gets to sell the property and also come after me as an individual.

I just dont get what all the fear and loathing of lending to a SMSF is all about:confused::confused:
 
Now - why cant I just do the deal in the $2 company and discretionary trust and then instigate a loan arrangement between the corporate trustee of the borrowing entity and the corporate trustee of the SMSF?
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Hi Telsa

There is nothing stopping you lending the funds to your SMSF whether you do it as an individual or through some other entity such as a trust.

The only problem is that you will need to have other security because a SMSF can not mortgage its asset/s. The legislation states that the only way a fund can borrow is when the asset is held in a bare trust and the debt is by way of an limited recourse loan.

On the interest rate quoted, 10% is on the high side as there are two lenders out there that do SMSF loans in the 7.2% - 7.4% variable interest rate range and one of these does not require a personal guarantee.

On the fees/costs for SMSF loans it's just banks being banks....
 
Hi

Most lenders asking for guarantees on limited recourse SMSF lends dont understand ............................

Partially, the same clowns ( but in a different circus) also want personal guarantees from adult beneficiaries of a disc trust, even where those adults are NOT the trustee or the directors of the trustee.

Thats the best form of illegitimate 3rd party guarantee that I have heard of. The lenders argument is that they need protection from the bene's in case they ever get sued.....................again, they dont understand the discretionary bit.

ta
rolf
 
Thanks to both...
Mike,
would it be possible for the director of the 1st corporate and trust that has purchased with a loan from the bank then allow the corporate trustee of the SMSF to purchase the property without holding a mortgage over the property?
 
hi
who is looking after your smsf
just because its a smsf does not mean you run it your self you need to get people around you that understand smsf's
its interesting that you have used
borderline ursury
I am not sure which board you are looking at.
there is a group of solicitors that just charges 95% interest in one year for a com loan and charged 350k to break the loan
is that ursury well on your example its 900 or 1000 times ursury
borderline ursury is a good term but charging 10% does not come close
no I don't think that is teh best deal but fare from borderline ursury in my book.
but back to the post
smsf need to be run correct and a free to air board is a good place to read or understand but the market is very different
I have three groups taht are doing 100% funding on new units to smsf's
and they are doing the difference of the bank to the purchase price at 2 or 3% for 5 years.
there is no size fits all
mike f would be a good place to start but there are a couple of others
I have a vested interest in investing with smsf's as I set up developments with them investing in them
and no they are not for a board.
but investing with a smsf is a plan
not just a purchase
and does need to be worked thru
 
I am buying a property in my SMSF.
My SMSF has a corporate trustee and I am the director and sole member.
The SMSF is to contribute $100k toward a $380k purchase.
Most of the advice on how to proceed involves setting up a corporate trustee for a bare trust to act as security guardian of the purchased property.
Somehow under this "installment" structure the SMSF is deemed to have bought the property.
Lending from banks under this arrangement is borderline ursury.
There is a lot of drama and angst that the bank can only issue a limited recourse loan to a SMSF. However the banks still want the director of the security custodian (me) to provide additional guarantee on the loan, so really, they have their arses covered well.
I have been quoted a $1800 application fee, almost 10% interest and a 65-70% LVR (and there it is likely the valuation will be low, to further protect the banks position, to do the above purchase for the SMSF.
HOWEVER, If I buy the same property in a $2 company and discretionary trust structure - suddenly the angst about limited recourse evaporates.
The deal them becomes a $600 application, ~7% interest and an 80% LVR.

HUH?

Now - why cant I just do the deal in the $2 company and discretionary trust and then instigate a loan arrangement between the corporate trustee of the borrowing entity and the corporate trustee of the SMSF?
The SMSF does not have to borrow from the bank. It can borrow from anyone.
So - what am I missing or not understanding here?
Surely as SMSF Trustee I want the best deal for my fund - which is lower application fees, lower interest and higher LVR?
At the end of the line is lil old me anyway, so under either scenario, if it all goes to excrement, the Bank comes after me as the guarantor under both arrangements - so what the ????

I mean - really - where is the risk?? I am borrowing $280k, the property will be rented at about $450pw; there is my 9% employer contribution on about $80k and I can salary sacrifice say another $100 or even $200pw into the deal.

If I loose my job AND loose a tenant - well that can happen whether it is SMSF owned or not - and despite the terror of the non-recourse loan, the bank still gets to sell the property and also come after me as an individual.

I just dont get what all the fear and loathing of lending to a SMSF is all about:confused::confused:

Hi Tesla,

I used STG for my SMSF purchase and it was at LVR 72% without personal guarantees and a very competitive interes rate (almost not difference with the current variable). A friend of mine did his with Westpac at LVR 80% with personal guarantees and competitive interest rate too. The application fee was approx $2k. The killer was setting up the installment warrant (altogether approx $10k).
 
Thanks to both...
Mike,
would it be possible for the director of the 1st corporate and trust that has purchased with a loan from the bank then allow the corporate trustee of the SMSF to purchase the property without holding a mortgage over the property?

Telsa

Firstly a SMSF can not purchase residential property from a related party as the legislation forbids it.

On the second part to your question regarding not holding a mortgage, even if you could sell the property to your SMSF and as I said you can't, I guess there is nothing legally stopping you from doing this however the ATO has stated on a number of occassions that they expect to see a commercial rate of interest paid by the SMSF in related party situations and so if there was no mortgage (the loan would be unsecured) want rate would need to be charged?

Also, you would still need to set up the instalment warrant/security custodian arrangement as this goes hand in hand with the SMSF being allowed to borrow.
 
Hi Tesla,

I used STG for my SMSF purchase and it was at LVR 72% without personal guarantees and a very competitive interes rate (almost not difference with the current variable). A friend of mine did his with Westpac at LVR 80% with personal guarantees and competitive interest rate too. The application fee was approx $2k. The killer was setting up the installment warrant (altogether approx $10k).

Agent007

Instalment warrant documentation including establishing the coprorate trustee is pretty simple to arrange and can be put in place for far less than what you seemed to have paid. I've seen it done for around $1,000-
 
Hi All,
A few posts back I was asked for an update.. have been out there "making it happen" and so not on lurking on the forums....

I already had the SMSF with a corporate trustee. (Bought in 2009 and piad WAAAAY too much, so lets just move on, OK - its about learning curves and all.....


For this recent property acquisition I did this:

I set up a corporate trustee for a security custodian trust.
Pretty simple to do - can be done for $1k-ish.

Then I exchanged contracts and paid the deposit from my SMSF. Using the security custodian trustee on the contract.

I was able to negotiate an extended settlement as I had the agent explain to the vendor that I was buying in a SMSF and I would need extra time to make it all happen.

$111K - Held in SMSF after all rollovers
$380k - purchase price
$266k - 70 per cent LVR
$3K * missing $$$.cc will be kicked in by me as contribution to SMSF.**

$1000+ - Security custodian corporate trustee and trust
$600 - Bank loan fee
$12,000+ stamp duty
$?1500-2500? Bank to send Trust Deed thru its legal wringer (price is fluid!)
$2000 - $3000 Conveyance and other legal bits

There may be other costs I have overlooked in this post. Some of these costs are not nailed down - but they are the prices I have been quoted a few different places. It seems a bit of a game of roundabouts and swings - one place one item is cheaper, but the next is more expensive - it is difficult to cherry pick the bargains, but I am trying!

Myself, For me in my situation, I think this is a great investment and I personally am ecstatic I have finally taken the plunge as I have wanted my money out of managed funds and into direct property for several years now. (I am not saying you should do it, I am saying this is what I thought would be a good investment option for me. I am happy with my decisions. I am happy with the property I have bought. I am very happy with the price I paid, I am very very happy with the growth potential. I intend to hold this property long term - even into a Testamentary Trust.

Looking forward:
Loan repayment:
$1000k pm - employer contribution and small salary sacrifice
$300//$600pw rent ****

I have bought a residential property and am getting residential finance, but the dwelling is within a town CBD and surrounded by similar dwellings converted to commercial uses - lawyers, accountants a physio, etc - It is zoned for commercial use and so I am intending to have a commercial rental rather than a residential lease.
Again - an excellent property choice for a SMSF, I believe.

Now, re the "missing" $$$.cc I will kick in to the SMSF.
Being over 50 I can contribute $50k - so whatever I kick in then becomes a tax deduction, correct?

Now if I use the $$$ from a LOC - can I deduct the interest from my personal income tax too?

I know it is possible to be "cheeky" with super - but is this going too far?
 
Hi All,

I have bought a residential property and am getting residential finance, but the dwelling is within a town CBD and surrounded by similar dwellings converted to commercial uses - lawyers, accountants a physio, etc - It is zoned for commercial use and so I am intending to have a commercial rental rather than a residential lease.
Again - an excellent property choice for a SMSF, I believe.

Now, re the "missing" $$$.cc I will kick in to the SMSF.
Being over 50 I can contribute $50k - so whatever I kick in then becomes a tax deduction, correct?

Now if I use the $$$ from a LOC - can I deduct the interest from my personal income tax too?


I know it is possible to be "cheeky" with super - but is this going too far?

If the property is zoned commercial don't be surprised if the lender changes their tune. From my experience they will not do a resi lend on comm zoned property but if you can get away with it good on you.

As to your question regarding contributing $50K ....if your self employed then yes you can subject to certain rules ....

http://www.ato.gov.au/superfunds/content.asp?doc=/content/00141582.htm

but if your a PAYG then the answer is no your employer would claim the deduction.


As to claiming the interest on the LOC again no if the funds are treated as a contribution.


The above is not advice just my understanding of the rules but you should speak with your SMSF fund accountant/auditor.
 
Agent007

Instalment warrant documentation including establishing the coprorate trustee is pretty simple to arrange and can be put in place for far less than what you seemed to have paid. I've seen it done for around $1,000-

Hi Mike,

Who can set up a Custodian Entity at the price you mentioned. I want to purchase another IP under the SMSF but, the entity I have only supports 1 loan. Also, is there a bare trust arrangements that can be set to support multiple IP loans?

Thank you!
 
Hi 007

There are a number of document providers around the country that provide SMSF advisers with the necessary structure & paperwork and it therefore depends on whether or not your adviser adds a margin on top as to what you end up paying. There may also be some that will provide trustees direct but usually these are more expensive.

Not sure I understand why you say your entity only supports 1 loan? The security custodian is normally just a simple Pty Ltd company and you only need one of these as it can act as bare trustee for multiple properties. All you need is a seperate set of bare trust/instalment warrant docs for each purchase.

Question...where did you get your original docs/structure from?
 
Not sure I understand why you say your entity only supports 1 loan? The security custodian is normally just a simple Pty Ltd company and you only need one of these as it can act as bare trustee for multiple properties. All you need is a seperate set of bare trust/instalment warrant docs for each purchase.

Hi Mike,

I referred to the bare trust/instalment warrant docos. Not sure if 1 can be set up to support multiple loans


Question...where did you get your original docs/structure from?

From the solicitior's office. My understanding is it was produced in-house.

Thank you!
 
007

As I said in previous post if you have the security custodian company all you need for a 2nd property purchase is an additional the bare trust/instal warrant set of docs.

We get them from a company which has all its docs vetted by the banks legals on behalf of clients using our services of $198- with no mark up.

PM me if I can assist.
 
Now, re the "missing" $$$.cc I will kick in to the SMSF.
Being over 50 I can contribute $50k - so whatever I kick in then becomes a tax deduction, correct?
?


You state your employer is paying super contributions for you. Unless your salary is less than 10% of your taxable income, my understanding is that you are not entitled to deductions for additional contributions. As always, check with your accountant.
Marg
 
just a point of interest for those following this thread, I went thru a similar process in buying an IP via a property warrant and relying upon the advice of my accountant of 4 years.

Accountant had been OK for me to use bank A, (I had managed to negotiate on fees and interest rate with them ) but after having signed the contract and the clock is ticking, suddenly accountant says no, you can't use Bank A too much trouble, docs not up to scratch. If you do you are on your own!

Well given I am relying on my accountant's advice to set all this up, I had to go with Bank B because I was relying upon him to pull it all together. So for me its higher costs, review fees etc etc , when I stumble on the fact that my accountant is getting a commission when his clients use Bank B. So its not enough for him to be satisfied with his not inconsequential fee, he has to chase a commission to boot.

Talk about conflict of interest when you are seeking independent advice. You would think that your own accountant would be having your interests at heart but sadly this was not the case. Needless to say he is no longer my accountant but for those in Melbourne I would not be recommending a pat on the back for this man !

So make sure you are permitted to choose who you can borrow from and not be corralled to just one lender.
 
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Talk about conflict of interest when you are seeking independent advice. You would think that your own accountant would be having your interests at heart but sadly this was not the case. Needless to say he is no longer my accountant but for those in Melbourne I would not be recommending a pat on the back for this man !

There's one like that in Perth too. Very popular but I wouldn't go near them if you paid me.
 
Back to the OP, I don't know why there is a difference between Individual Trustees and Company Trustees. With BoM/STG, for Individual Trustees, a max 72% LVR is allowed but for Company Trustees an 80% LVR is allowed. I don't get why they are different either. But their rates are way lower than you were quoted: 5.9% variable or 5.64% fixed for three years. But then they have a $12 montly fee so that pushes up the comparison rate.

The fees are pretty steep though:
Application Fee: $1,500
Company Trustee: $550
Legal Fees: $615
Setup Fees: $500
 
Some issues noted re posts above:

* St George doesnt generally ask for Director guarantees v's other banks. Strangely Westpac dont follow this same policy. The STG product is seen by many as a true "limited recourse" product.
* A related party loan v's a bank loan will be cheaper....Doesnt suit everyone though. example - Mum & Dad draw down $200K on their home equity loan and lend this to SMSF instead of a bank loan. They take a first mortgage over the property in the bare trust (just as a bank would). This may achieve a better loan rate (home equity v's IP SMSF rates) and avoid all bank legals etc.
* Dont attempt to buy using a LBRF if smsf isnt already fully established. Takes up to 45 days to get smsf ready with rollovers etc. Often an extended settlement is needed due to all delays and compliance issues.
* Bank legals can be significant. Its not unusual that minor changes are required to trust deed for SMSF or bare trust. The banks lawyers have a capitave market and there is no choice. (Extortion ?)
* Many banks require a corporate SMSF trustee due to consumer credit in some jurisdictions. Lower LVR's for human trustees or outright refusal can occur.
* Loan serviceability issues can be onerous...For example proven track record of extra contributions etc. Some areas can have lower LVR's eg rural areas or outer metro. I have seen some post codes with LVR of 50%.
* Most banks require two sign-offs. An accountant and a financial planner. This can be VERY difficult to obtain if you DIY.
 
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