Investing in commercial property through SMSFs has traditionally been more popular than residential property - though it is starting to even-out. Many SMSF lenders typically lend for commercial property, while decidedly fewer also lend for residential. So, why would you want to invest in commercial property, and how do commercial property loans for SMSFs work?
SMSF Commercial Property Loans Explained
Ever wanted to be Tony Stark and own your own highrise? Using your self-managed super fund is one of the most accessible ways of investing in commercial property. And the good news is, there’s a loan for that, and loans typically come with much higher loan limits than with other types of property loans. It’s also popular for small and medium enterprise (SME) owners to invest in commercial property through their SMSF and lease it back to themselves by paying rent into the SMSF. Here’s what else you should know about SMSF commercial property loans.
While not all are created equal, some lenders have certain restrictions on the type of commercial property in which you can invest. Some lenders forbid renovations, while many others also limit loans to ‘standard-use’ commercial properties. This includes offices, shops and warehouses, and may exclude development sites or vacant land.
An SMSF loan is what’s called a limited recourse borrowing arrangement, or LRBA. What this means is that in the event of default, the lender can only come after the asset used as security for the loan, rather than other investments in the SMSF.
As a consequence, interest rates with SMSF commercial property loans are often higher than what you would find on a regular commercial property loan. It is not uncommon for an SMSF loan to be a full percentage point higher - or more.
Oh, the fees. This is lender-specific, but don’t be surprised to find fees attached to your loan such as: application fee, SMSF review fee, valuation fee, establishment fee, settlement fee, ongoing fee, discharge fee, and other fees. Depending on your lender, by the time you secure the bag, you’re a couple of grand out of pocket.
LVRs for SMSF Commercial Property Loans
Commercial property loans through SMSFs are typically limited to a 70% loan-to-value ratio (LVR). What this means is that a borrower must have a minimum 30% deposit. While there are always exceptions to the rule, this is higher than residential property SMSF loans which typically require 80% LVR i.e. only a 20% deposit.
Satisfying the Australian Tax Office
Before investing in commercial property, you’ll need to make sure it’s actually ‘business real property’ to satisfy the ATO and its requirements for SMSFs. Under the business use test, the property must be used wholly and exclusively in one or more businesses. Farms with residential dwellings are still allowed, provided the dwelling is on land no more than two hectares and the main use of the property is not for domestic or private purposes.
Other than that, the usual ‘sole purpose test’ and ‘at arm’s length' requirements still apply, such as having the fund only to benefit members and trustees, and not leasing a property at a discounted rate or to family members.
SMSF commercial property loan pros
- Leverage: One of the most important benefits is that you can use money you don’t have on what’s hopefully a high-performing asset, and the return on investment outweighs the interest you pay on your loan.
- Access to high rental yield: Commercial properties, particularly high-street shops, often command extremely high rents. This can then be fed straight back into your SMSF, so you benefit not only from capital gains, but high rental yields too.
- Tax benefits: Superannuation carries with it special tax treatment in Australia, and having commercial property in your SMSF could be more beneficial than investing outside of your super - you just can’t access your super until retirement.
- Higher loan limits: SMSF residential property loans are often restricted to $1 million, while for commercial properties it could be $4 million or higher.
SMSF commercial property loan cons
- Higher interest rates: SMSF commercial property loans typically attract much higher interest rates than with regular home loans, which can add hundreds or thousands to your loan repayment every month.
- Market volatility: Commercial property is typically a much more volatile asset class than residential property. Certain events - like a pandemic - could trigger high vacancy rates and plummeting asset prices.