SMSF Borrowing (LRBA)

SMSFs are able to purchase an investment property using finance from the bank. This is done through the use of a Bare Trust structure with a Corporate Trustee.

The SMSF can invest in commercial or residential property, but not your own residence. You are prohibited to have any dealings with a related party when investing in residential property. So you cannot live in the property, use the property as a holiday house or have a family member live in it. It should be for the sole purpose of investment of your SMSF.

Some important points regarding the use of a SMSF for property investment are as follows:

  • To invest in property, it is important to set up the SMSF first, including the structure above. A SMSF itself cant borrow money, and therefore a Bare Trust structure is put in place to facilitate the loans
  • The only purpose of the Bare Trust (also referred to as a Property Trust) is to keep title over the investment property until the loan is paid off
  • All property related costs can be paid by the SMSF
  • The SMSF receive rental income and pay for all operating expenses and loan repayments
  • Only one property can be added into a structure like this
  • The property will revert back to the SMSF when the loan is repaid
  • Funds can be borrowed from the Trustees or the bank, or a combination of yourself and the bank
  • The loan type a bank would give the SMSF is a limited recourse loan, meaning the bank does not have a recourse on the SMSF should the loan default
  • For this reason banks usually ask for a personal guarantee over the property from Trustees
  • The maximum Loan to Valuation Ratios (LVR) is usually around 80% with residential property and 70% with commercial property when members guarantee the loans
  • When theres a bank loan and a 60% LVR, the bank might not require guarantees from Trustees
  • The lender to the SMSF can be the Trustees as well, so you dont have to use a bank
  • Trustees can borrow from the bank and then on-lend to the SMSF this option might make the administration easier
  • The Bare Trust and Corporate Trustee are merely legal entities for holding the property and all transactions take place in the SMSF
  • SFA charges a once-off fee to set up these entities

In the past loans to SMSF were done through instalment warrants and interest charged was at a premium. Nowadays these Limited Recourse Borrowing Arrangements are much more popular and interest rates are similar to other property loans.

All Funds we set up are established with Trust Deeds from Cleardocs. These Trust Deeds are regarded as the best in the industry as it is generally acccepted by all the banks for SMSF property loans.


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