SMSF loans are a popular way to buy real estate for self-managed super funds. The loans are also known as Limited Recourse Borrowing Arrangements (LRBA). The latest tax office data indicates there is nearly $67 billion worth of LRBAs held within SMSFs in Australia, as well as nearly $88 billion worth of non-residential property.
The benefit of commercial property is that you usually get long term, stable and high-paying tenants, and you can leverage a lot of your money as commercial property can be worth millions. The downside is that the commercial property sector is usually a lot more volatile than the residential sector, and you have more money riding on the line.
Not all lenders offer commercial property SMSF loans, so it pays to do your research.
Commercial Property SMSF Loan Interest rates
The interest rates on SMSF loans for commercial properties tend to be a little bit higher than ones for residential property, and considerably higher than regular home loans. This is because of two key reasons:
You are borrowing for a more volatile asset class, and likely borrowing much more: Commercial property tends to offer less stable capital gains than residential property, and tends to cost much more. You can often borrow $4 million or more with a commercial property SMSF loan.
Limited recourse: LRBAs as the name implies limit the recourse for the lender. This means they can’t go after other assets in the fund should you default. This means if they seize your property worth $400,000 but you actually owe $500,000 on the loan, they can’t go after the remaining $100,000 from your SMSF. This heightens risk for a lender.
Lenders offering SMSF loans for commercial properties
The pool of lenders offering commercial property SMSF loans is decidedly smaller than for residential property. More prominent lenders include:
Bank of Queensland - Lending Specialists
The major banks pulled out of SMSF lending sometime ago, so the space is mainly left for non-bank lenders - ones you might have heard of, and other more bespoke options.
Deposit requirements - LVR
As you are generally borrowing a lot more money, lenders might like you to have a lower LVR i.e. a bigger deposit. This means you will need to be willing to redirect a large proportion of cash to your SMSF for the deposit, liquidate other assets, or use existing funds in the SMSF.
However, some lenders also allow you to borrow up to 90% LVR. But if you’re borrowing for a $4 million property, that’s no mean feat - a $400,000 deposit would be required.
The good news is that with some lenders you might not need to pay LMI or lenders mortgage insurance even if you’re borrowing 90%.
While for a regular a home loan it may be possible to avoid most fees with a no-frills mortgage, with SMSF loans, the fees are generally higher. Typical fees include:
SMSF review fee
Deferred facility fee
This is partially because the admin requirements for the lender on SMSF loans are much greater than on regular home loans. Further, these might be adjustable on a case by case basis, so you might not know how much you’ll need to fork out until you apply.
SMSF tax considerations
There’s a few requirements from the Australian Tax Office to satisfy before you go about snapping up whatever property you have your eyes on. There are three main things to keep in mind:
Business use test: The property must be wholly and exclusively used for one or more businesses i.e. it can’t be used to live in, except for farms with residential dwellings. However many lenders won’t lend for farms within SMSFs.
Sole purpose test: The fund must have the sole purpose of being to benefit fund members and trustees in the accumulation phase and in retirement. You will need to annually update your investment strategy document to ensure this is being met.
At arm’s length test: The tenants you get must be genuine and the property must be offered at market rates, or at least have a genuine attempt at doing so. You may be able to rent the property to a relative, but it must be done at fair market value.
SMSF commercial property loan pros
Larger loan size
With commercial property SMSF loans you can often borrow up to $4 million - even higher in some cases. For residential property this might be a tad lower, and for regular home loans across many digital lenders you are restricted to $1 million. This allows you to leverage that cash deposit two, five, or even ten-times.
Commercial property rents are typically very high, and tenants sign long-term leases. This gives you peace of mind as opposed to the residential market where leases are often either six-monthly or 12-monthly. This makes the likelihood of your commercial property being strongly cashflow positive, which benefits members.
SMSF commercial property loan cons
Higher interest rates
It’s not out of the realm to expect commercial property loans to be around 50 basis points higher than residential property SMSF loans, and up to one percentage point higher than regular property loans. This is because of the enhanced risk for lenders we mentioned earlier.
Remember Covid? Overnight CBDs became ghost towns, tanking the price and demand of commercial properties. While you don’t need to buy a property in the city, nor does it seem likely something like the pandemic will happen at that scale again in our lifetime, commercial property is more volatile. And if you can’t get tenants, you’re left holding the bag on an asset worth potentially millions.