One of the most attractive benefits of a Self-Managed Super Fund (SMSF) is the ability to choose where and how to invest your money. With this freedom, however, comes great responsibility.
Deciding how to invest your retirement funds is a decision which should not be taken lightly.
If you are considering buying investment property with super, there are a few things you need to consider.
Read more: how to set up an SMSF
Residential Vs Commercial SMSF property Australia
Commercial property is any property from where a business operates. It can be anything from a small cafe to large office buildings.
Using your SMSF to purchase a commercial property has some benefits over a residential property investment.
One of the most interesting features is that an SMSF can purchase a commercial property and then rent it to one of the SMSFs trustees. This is not permitted when buying a residential property investment.
This is an attractive option for business owners as they can own a commercial property and pay rent directly to their SMSF rather than a landlord.
You must keep in mind, however, that businesses must pay a market rental rate for the property.
Lease agreements must also be in line with the terms and conditions of a typical commercial lease.
Invest in commercial property and lease it back
Most commercial properties purchased through an SMSF are then leased back to a business operated by an SMSF member or one of their relatives.
This feature of SMSFs is particularly attractive to professionals such as accountants, dentists, lawyers, or engineers who are buying commercial properties through their funds and then leasing them back.
As a result, they can pay rent for their business into their SMSFs rather than to a landlord.
Commercial rental yields are generally larger than residential yields, so their SMSFs can potentially grow quicker.
If done correctly, the benefits of this type of investment can include minimising business overheads and maximising cash flow long term.
Investors must bare in mind, however, that this practice is highly regulated by the Australian Tax Office.
SMSFs could face serious penalties if they don’t follow the appropriate rules and regulations.
It is highly recommended to seek guidance from professionals such as accountants, financial advisers, and solicitors before buying investment property with super.
Acquiring property & SMSF commercial property loans
If a member of the SMSF runs a business, then 100% of the money in an SMSF can be invested in commercial real estate.
However, it is advisable not to invest in one asset alone. You should have enough funds left in your SMSF after purchasing your commercial property to invest elsewhere.
Purchasing commercial business property from a fund member is not classified as a related party transaction, so it is also permissible to transfer an existing commercial investment from a member into an SMSF.
However, as with all SMSF property purchase, the transfer must be for market value.
An alternative option is applying for a SMSF commercial property loan.
SMSF borrowing is subject to stricter lending rules than when borrowing at a personal level. Interest rates also tend to be higher.
Deposits required are also generally larger, with loan-to-value ratios around 65 per cent.
The process for getting an SMSF commercial property loan is complex and time-consuming.
While the process of purchasing a property through an SMSF is similar to buying a property the traditional way, you will find there are more hurdles that you need to jump.
In general terms, you’ll find that it will take about a week to gather all the necessary paperwork for SMSF borrowing.
A long term game
Once you secure your SMSF commercial property loan, you can use the funds to buy a property, maintain it or repair it.
The borrowed money cannot be used to make improvements. This is strictly regulated by the Australian Tax Office.
As such, you should be acquiring commercial property through a SMSF with the intention of holding onto the asset long term.
Commercial property capital gains tend to grow at a slower pace than with residential investments.
As a result, this type of investment suits the passive and long-term nature of a SMSF.
It is key to remember that the point of a SMSF is to support retirement. Any decision a SMSF trust makes around purchasing commercial property must benefit the retirement of its members.
If you are playing the long game, buying investment property with super can be a good alternative.
You should carefully take into account the benefits, restrictions and regulations that come into place when buying commercial property using your SMSF before going down this path.
It is recommended that you seek professional advice to assess whether this is the correct investment strategy for your fund.