The Complete Guide to SMSF Property Lending

SMSF property lending allows your self-managed super fund to borrow money to purchase property through a Limited Recourse Borrowing Arrangement (LRBA). The property is held in a bare trust until the loan is fully repaid, at which point it transfers to the SMSF. The limited recourse nature means if the SMSF defaults, the lender can only claim the property, not other SMSF assets.

SMSFs must satisfy strict ATO requirements when borrowing for property. The sole purpose test requires the investment to provide retirement benefits, not current benefits to members. The arm's length test requires transactions at market rates. If leasing to a related party business, the property must be business real property and the lease must be commercial. Properties cannot be lived in or used by fund members personally.

Commercial property offers advantages for SMSFs including the ability to lease to your own business. Residential property has more restrictions and cannot be leased to or used by fund members. Commercial properties often have stronger yields (5-8%) compared to residential (2-4%). However, commercial has higher vacancy risk and may require larger deposits. Both can be purchased through LRBAs with appropriate structuring.

SMSF lending rates currently start from around 6.24% p.a. for well-qualified borrowers. Maximum LVR is typically 70-80%, meaning a 20-30% deposit is required. Many lenders require minimum loan amounts of $200,000-$500,000. The SMSF must demonstrate sufficient cash flow to service the loan, including a buffer for vacancies. Both bank and non-bank lenders offer SMSF property finance.

One major advantage of SMSF commercial property is the ability to lease premises to your own business. The property must qualify as business real property (used wholly and exclusively for business). The lease must be at arm's length (market rent, commercial terms). Rent payments become tax-deductible for the business while building super assets. This strategy provides both immediate tax benefits and retirement asset growth.

Some SMSF property purchases involve complex structures. Tenants in common arrangements allow multiple SMSFs to co-own property. Unit trust structures can provide flexibility for commercial developments. In specie transfers allow transferring existing property into an SMSF (business real property only). These structures require specialist advice from accountants and lawyers experienced in SMSF property.

SMSF property investment carries risks including concentration risk (property may dominate fund assets), liquidity risk (property cannot be quickly sold), compliance risk (penalties for breaching rules), and gearing risk (borrowing amplifies gains and losses). Consider whether your SMSF has sufficient diversification and whether members are close to retirement (reducing time to recover from downturns).