Compare SMSF Commercial Property Loan Rates

Investing in commercial property is a popular SMSF investment strategy. Many SMSFs invest in commercial real estate and lease it back to themselves, effectively paying rent into their own SMSF.

Although residential property investments are becoming more popular, there are more lenders that provide funds for an SMSF commercial investment. So, why would your SMSF invest in commercial property, and how do SMSF commercial property loans work?

SMSF commercial property loans explained

Ever wanted to be Tony Stark and own your own high-rise? Using your self-managed super fund can be one of the most accessible ways of investing in commercial property.

The good news is, there are specialist loans for just that purpose that typically come with much higher loan limits than for other property types. But SMSF loans are different to standard investment loans. Here's what you should know.

Loan restrictions

Some lenders will have certain restrictions on the type of commercial property your SMSF can invest in. Lending extra funds for major renovations or repairs is forbidden under SMSF lending rules, so that may rule out certain properties (unless your fund can pay separately for the work required). Many lenders also limit loans to 'standard use' commercial properties. This can include offices, shops and warehouses, but may exclude development sites or vacant land.

Interest rates

An SMSF loan has what's called a 'limited recourse borrowing arrangement', or LRBA. This means, in the event of a default, the lender can only come after the asset used as security for the loan, rather than other assets of the SMSF (as lenders can pursue in the case of standard loans). This is to protect the retirement funds of all SMSF members.

As a consequence, interest rates for SMSF commercial property loans are typically higher than what you would be charged for a regular commercial property loan.

Fees

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 investment, you could be several grand out of pocket.

LVRs for SMSF Commercial Property Loans

Commercial property loans through SMSFs typically require at least a 70% loan-to-value ratio (LVR). This means the borrower must have a minimum deposit of 30%. While there are always exceptions according to individual lenders, this can be higher than for residential property SMSF loans which typically require 80% LVR - a 20% deposit.

Satisfying the Australian Tax Office

Before investing in commercial property, you'll need to make sure it's 'business real property', according to ATO requirements. Business real property generally means land and buildings used wholly and exclusively for a business. This means no one can live there (although there are different rules surrounding residential dwellings on land used for primary production).

How to buy a commercial property through your SMSF

Buying a commercial property through your SMSF is a bit more complicated than buying one for yourself. There are strict guidelines surrounding SMSF property purchases with harsh penalties if you fail to comply.

As a general rule, properties must pass the 'sole purpose test' which means the investment must be for the sole purpose of providing benefits to the members of the SMSF. As well, all SMSF transactions must be conducted on an 'arm's length' basis, meaning any fund asset must be bought and sold at market value, and income on the assets should show a true market rate of return.

Before you purchase

• Ensure it aligns with your SMSF investment strategy. Every SMSF must have a documented investment strategy and trust deed. It's wise to consult an SMSF advisor to be clear on whether a commercial property investment fits the fund's stated strategy. The purchase will also require documentation to be updated as it will change asset diversification, liquidity, and other considerations.

• Know your budget. Some SMSFs may be in a position to buy a commercial investment property outright, but it may be a better move to purchase using an SMSF loan depending on your fund's investment strategy, liquidity requirements, and other considerations.

• Find an SMSF loan that meets your needs. If your SMSF can cover the full cost of the required deposit, an SMSF loan can cover the rest. But loans are not all equal. You'll need to research the market to find a loan that not only has a competitive interest rate but provides the terms and conditions that best suit the needs and investment strategy of your SMSF.

• Set up a 'bare trust' within the SMSF. A bare trust must be created for an SMSF to borrow money under an LRBA. Essentially, although the bare trust will be owned by the SMSF, the commercial property purchased, and the mortgage taken out, is held by the bare trustee. This is to safeguard the SMSF's other assets in the event of a default on the loan. The cost of setting up a bare trust is also another expense that needs to be factored into purchase calculations.

See also: How to buy property through an SMSF in Australia

It's advisable to consult a specialist SMSF advisor to ensure all is in place before you embark on a property search. As with most investment decisions, there are also some pros and cons you should consider in determining whether commercial property is the best investment for your SMSF.

SMSF commercial property loan pros

• Leverage: One of the most important benefits (of any investment) is that you can borrow money you don't have on what's hopefully a high-performing asset, with the return on investment outweighing the interest you pay on your loan.

• Access to high rental yield: One of the primary benefits of your SMSF investing in commercial property is the potential for higher rental yields compared to residential properties. Commercial leases can also be more stable, are for longer terms, and can provide higher income streams.

• Tax benefits: Superannuation carries with it special tax treatment in Australia. Rental income received by the SMSF is typically taxed at the concessional super rate of 15% which can be significantly lower than many people's marginal tax rates. As well, if you hold the property until the SMSF enters pension phase, rental income and capital gains may become tax-free. Investing through your SMSF can be considerably more beneficial than investing outside your SMSF.

• Higher loan limits: SMSF residential property loans are often capped at $1 million, while for commercial properties, the limit could be $4 million or higher. (This will depend on the lender and your individual circumstances.)

SMSF commercial property loan cons

• No renovations: You can't borrow money or take out a loan to fund any significant changes or repairs to a property purchased by your SMSF. These must be paid for through SMSF funds. Major alterations or repairs to a property can't be made until the SMSF loan is paid off.

• Higher interest rates: SMSF commercial property loans typically attract much higher interest rates than with regular home or investor loans. These can potentially add thousands of dollars to regular SMSF loan repayments compared to those for a standard investor loan.

• Complexity: SMSF loans come with a plethora of compliance and regulatory requirements and failure to comply with them can result in severe penalties. It's wise to seek specialist SMSF financial and tax advice before embarking on any SMSF investment to be aware of all the implications and ensure all requirements are met.

• Market volatility: Commercial property is typically a much more volatile asset class than residential property. Some events - such as a pandemic - can trigger high vacancy rates and plummeting asset prices while certain properties can fare better than others as commercial investments. Again, it's worth seeking specialist advice to ensure you invest in commercial real estate with good long-term prospects.

See also: How to buy a commercial property