Self-Managed Super Fund Lending – Let’s Talk Numbers
November 4, 2020
For medical professionals, buying your practice premises in a self-managed super fund structure (SMSF) is becoming more and more popular as a retirement strategy.
For many, the fundamentals make sense, you gain the benefit of being your own landlord while simultaneously creating a nest egg in a tax-effective environment.
Owning your practice premises has long been an attractive proposition for doctors, dentists and vets.Much of your goodwill can be tied up in your location and you invest heavily in the fit-out, so security of tenure is a priority.
When it comes to retirement, many doctors will sell their practice goodwill, but they’ll retain the premises. The rent paid by the new owner of your practice can provide an additional income stream after you’ve put down the stethoscope or dental drill! In that context, holding the property in SMSF could be a prudent strategy.
Through a limited recourse borrowing arrangement (LRBA) you can borrow to fund the acquisition of the premises in SMSF, limited recourse means that the lender’s rights are limited to the property asset and that they can’t go after any other assets held in the SMSF in the event of default.
So with an LRBA, you don’t need to have the full cost of the property available in your fund.
Credabl will lend up to 90% of the purchase price, meaning your fund will need to have 10% of the purchase price plus costs (stamp duty, legal costs etc.). It is also recommended that you still have some liquid assets in the fund post completion of the property transaction.
The old adage holds true that you don’t want to hold all of your eggs in one basket, diversification is important. The amount you should hold in liquid assets will vary depending on your individual situation and willneed to consider factors like how close you are to retirement –professional adviceshould be obtained when it comes to this. Many lenders will want to see at least 10% of the level of debt that the superfund is carrying,still held in liquid assets.
There is a limited pool of lenders in the market offering SMSF lending, most of the majors no longer do, and therefore some of the terms are quite unattractive withhigh interest rates and larger deposit requirements – so it’s important to shop around.We hear stories of doctors accepting these offers because they don’t know where else to look.
SMSFs can be expensive to set up and to run, in an ASIC report from June 2018, 32% of SMSF members found setting up and running their SMSF to be more costly than expected while just 9% of SMSF members found it less costly than expected. So you need to ensure that there will be sufficient cash coming into the fund to cover the running costs and the loan repayments.
The average operating and total expense ratios for various SMSF fund sizes are listed below. As you can see, the bigger the fund the more cost-effective it is to run.
There are restrictions around the amount of money you can put into super and how you do it, so you need to be cognisant of the concessional and non-concessional contribution caps.
And while it’s a strength that your practice will be the tenant and responsible for paying rent into the superfund, the tenancy agreement must be arm’s length and the rentbeing paid must be in line with market rent, it can’t be used as an avenue to get additional cash into the superfund.
As with all lending, you need to consider the possibility of interest rate rises, so work through how this would impact the funds cashflow and up to what level of an increase you could comfortably manage.
The fundamentals for medical professionals owning their practice premises in SMSF are strong, but it isn’t for everyone, it really will depend on your individual circumstances. Our comments here are of a general nature so it’s important that you engage a professional advisor to have a look at your particular situation. At the risk of tooting our own horn, we’re well connected in the medical industry so if you’d like an introduction to a financial or legal advisor or want to chat to us about an LRBA, get in touch.
For anyone thinking about taking advantage of the opportunity to access their super early, it’s important to speak to a professional first. They can provide an objective view of your financial circumstances and help you plan for both your short-term and long-term financial goals.
The Credabl team is available to chat live on our website www.credabl.com.au or you can call one of our specialist lenders on 1300 27 33 22.
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This article is a guide only and does not constitute any recommendation on behalf of Credabl Pty Ltd (ACN 615 968 100) or any of its related bodies corporate (Credabl). The information in this article is general in nature and we have not taken into account your personal objectives or financial circumstances or needs when preparing it. Before acting on this information you should consider if it is suitable for your personal circumstances. Credabl is not offering financial, tax or legal advice. You should obtain independent financial, tax and legal advice as appropriate.