Borrowing for property in SMSF

If your SMSF owns a property outright, can money be borrowed using that property as equity to purchase another property?

 

Assuming it is allowed, technically, if you want to borrow money inside a SMSF, usually the property have to be held in property trust/bare trust with corporate trustee i.e: not in your SMSF. This will imply transferring the ownership from your SMSF to the property trust, and I would believe it will attract stamp duty.

So, assuming the equity you took is just for deposit, you will have 2 property trusts (with their maintenance burden) under your SMSF with 2 mortgages to serve.

Isn't it too much hassle? Because you could just sell the property and buy a new one? This "leap frogging" strategy is too hard to be implemented in SMSF, IMHO.

 

No it is not allowed. You can only borrow to acquire property.

 

Thanks for the comments xtanda and terryw.
That’s a shame. I have $300K in existing Super. I was planning to create a SMSF and purchase a property through a bare trust for about $250K. Then use that property as collateral to purchase another property for say $500K. If I’m not allowed to do this then I can only borrow to purchase the $500K property. So that’s a shame.
OB

 

Oldbeer,

Why is it a shame? What not just buy the first property in the bare trust with a 70 or 80% LVR loan? That would leave some money for further property deposits. 20% of $250,000 is $50k so you could theoretically get about 4 properties this way.

And why not get a loan with a 100% offset account and place some of the left over cash and rents into this account? By the time you buy your 4th property you would probably have deposits for another one or two saved up.

 

TerryW,

Yes, after more investigation I’ve found that St George will lend 70% without personal guarantees. Using my super as you suggest I could pick up 3 x $250K props for an outlay of $225K and still have a good buffer in something like shares or bonds etc.

Thanks. That’s exciting. I’m getting onto it right now.

It was a shame because I could have an extra property if I could use the first one (purchased with cash) as equity deposits for the rest.

OB

 

Oldbeer,
Make sure you do the sums correctly and add in the additional costs to acquire, as you need to add in stamp duty and government fees as well as the additional costs of separate bare trusts. There is an argument you may need separate corporate trustee companies as well but it is in part dependant on the lender.

In addition make sure you can service the lending through a combination of rent, SCG and perhaps personal contributions. You may not have much left to achieve much in the way of investment earnings and you need to make sure you have ample liquidity in the fund or the ability to contribute more if needed.

There are other lenders that will go to an 80% LVR to help preserve your base funds. Terryw is correct, you cannot use a property within the SMSF environment to use as collateral for further funds, only to acquire. If you wanted to use the purchase and revaluation/refinance strategy, it has to be outside of super.

Good luck with it.
Greg

 

Very appropriate comments. Thank you Greg