How to Use Your Super to Buy an Investment Property

Understanding SMSF Loans for Investment Property

As an ADF member, you've dedicated your career to serving Australia. Now it's time to think about retirement security and wealth building for your future. One powerful strategy you might not have considered is using super to buy an investment property through a self managed super fund loan.

An SMSF (Self Managed Super Fund) gives you control over your retirement savings, allowing you to purchase residential or commercial property as part of your SMSF investment strategy. This approach can be particularly beneficial for current and former Defence Force members looking to build a solid retirement property strategy.

What is a Limited Recourse Borrowing Arrangement?

When your super fund borrows money to purchase property, it's done through something called a Limited Recourse Borrowing Arrangement (LRBA). This structure protects your other super fund assets - if something goes wrong with the property investment, the lender can only claim against that specific property, not your entire super fund.

Here's what makes SMSF property loans unique:

• The property must be held in a separate trust until the loan is paid off
• Your super fund makes the SMSF repayments from contributions and rental income
• The property can be either SMSF residential property or SMSF commercial property
• You maintain control of your retirement investments

SMSF Deposit Requirements and LVR

Unlike traditional home loans, super fund borrowing typically requires a larger deposit. Most SMSF approved lenders require:

• A deposit of 20% to 25% of the property value
• Maximum loan to value ratio (LVR) of 75-80%
• Sufficient funds in your SMSF to cover SMSF settlement costs

The SMSF LVR requirements are stricter than standard investment loans, but they help ensure your retirement savings remain secure while still allowing property investment opportunities.

SMSF Loan Rates and Repayment Options

When comparing SMSF loan rates across Australia, you'll find they're typically higher than standard investment loan rates. However, the tax benefits can make this a tax effective investment strategy.

You have two main repayment options:

1. Principal and Interest SMSF loans: You pay down both the loan amount and interest charges, building equity faster
2. Interest Only SMSF loans: Lower repayments in the short term, with rental payments helping cover costs

Some SMSF specialist lenders also offer an SMSF offset account, which can help reduce the interest you pay over time.

SMSF Tax Benefits

One of the most compelling reasons to consider using your super to buy an investment property is the favourable tax treatment:

• Rental income is taxed at just 15% within your super fund
• Capital gains on property held for more than 12 months are taxed at only 10%
• In pension phase, rental income and capital gains can be tax-free
• SMSF loan interest is tax deductible to your fund

Compare this to purchasing investment property in your personal name, where you'd pay your marginal tax rate (which could be up to 47% including Medicare Levy for higher income earners).

SMSF Property Rules and Compliance

Before you start your SMSF loan application, it's important to understand SMSF compliance requirements and SMSF property rules:

• The property must meet the 'sole purpose test' - solely for retirement benefits
• You and related parties cannot live in or personally use the property
• The property cannot be purchased from related parties
• A corporate trustee structure is often recommended (and sometimes required)
• All transactions must be conducted at arm's length

Breaking SMSF rules can result in significant penalties, so professional guidance is essential.

The SMSF Loan Application Process

Applying for an SMSF property loan involves more documentation than standard loans. You'll typically need:

• Your SMSF trust deed and compliance documents
• Recent SMSF Bank statements
• Evidence of your fund's investment strategy
• Property valuation and rental appraisal
• Details of your corporate trustee structure

Defence Loans can access SMSF loan options from banks and lenders across Australia, helping you find suitable SMSF approved lenders who understand the unique circumstances of Defence Force members.

SMSF Residential vs Commercial Property

Your SMSF can purchase either residential or commercial property:

SMSF residential loan options are popular because:

• Larger pool of potential properties
• Generally more liquid if you need to sell
• Familiar investment territory for most people

SMSF commercial loan benefits include:

• Potentially higher rental yields
• Longer lease terms provide stability
• You could even lease commercial property to your own business (at market rates)

SMSF Refinance Options

If you already have an SMSF property loan, you might benefit from SMSF refinancing. Circumstances when SMSF refinance makes sense include:

• Getting a lower interest rate
• Accessing better loan features
• Consolidating multiple SMSF loans
• Changing from interest only to principal and interest repayments

Is an SMSF Investment Property Right for You?

Buying property with super isn't suitable for everyone. Consider whether:

• Your super balance is sufficient (generally $200,000+ is recommended)
• You're comfortable with property investment and management
• Your SMSF investment strategy aligns with property investment
• You have time until retirement to benefit from the strategy
• You understand the SMSF loan fees and ongoing costs involved

For ADF members who are also considering expanding your property portfolio or looking at investment loans, an SMSF mortgage can be one component of a broader wealth building strategy.

Moving Forward with Your SMSF Property Investment

Using a self managed super fund loan to purchase investment property can provide control over your retirement and help build long-term wealth through a tax effective investment structure. However, it requires careful planning, ongoing compliance, and professional guidance.

At Defence Loans, we understand the unique financial situations and opportunities available to current and former Australian Defence Force members. We work with SMSF specialist lenders across Australia to find loan solutions tailored to your circumstances.

Whether you're interested in SMSF residential loans, SMSF commercial loans, or want to explore other investment options, our team can help you understand your choices and requirements.

Call one of our team or book an appointment at a time that works for you to discuss how an SMSF property loan could fit into your retirement planning strategy.