Purchasing property through SMSF lending is becoming increasingly popular, however the requirements and restrictions around the borrowing strategy can be quite stringent.
SMSF lending for property investment can become complex due to the strict borrowing conditions known as a limited recourse borrowing arrangement (LRBA). Borrowing from your superannuation can allow for greater SMSF portfolio diversification but consequently does carry some risks that should be considered when deciding between financing options.
Some risks involved with LRBAs include:
Set-up upfront and ongoing costs tend to be higher using your SMSF, and applicable interest rates may be higher.
Frequent loan repayments require sufficient cash flow. If you experience a drop in cash flow due to a drop in rental income or not being able to rent out the property, inadequate income from other sources, higher than anticipated expenses, such as legal costs, or the need to pay pension payments you can risk losing the property.
Hard to cancel
Incorrect property contract and loan documentation may not allow for unwinding, which may require you to sell the property, causing substantial losses.
Restrictions on property alterations
Entering into a LRBA restricts any property alterations that change the character of a property, until the loan has been paid off.
Potential tax losses
Losses incurred from the property cannot be offset against your taxable income outside of the SMSF.