SMSF Commercial Property Loan Rates

Understanding SMSF Commercial Property Loans

SMSF Commercial Property Loans are specialised financial products designed to facilitate the purchase of commercial properties (office spaces, warehouses) within an SMSF. These loans are typically secured against the property being acquired, and the income generated from the property's rental can be used to repay the loan or is funnelled back into the SMSF to increase retirement savings.

It’s quite common for small and medium enterprise (SME) owners to invest in commercial property through their SMSF and then lease it back to themselves by paying rent into their SMSF.

Here are some other important things to understand about SMSF Commercial Property Loans:

SMSF Commercial Property Loan interest rates

Interest rates on SMSF Commercial Property Loans are generally much higher than what you would find on a regular commercial property loan and this is because SMSF loans are a limited recourse borrowing arrangement (LRBA). This means in the event of a default, the lender can only come after the asset that has been used as security for the loan, rather than other investments within the SMSF.

Interest rates on SMSF Commercial Property Loans are also higher because you are borrowing for a more volatile asset class, and are likely borrowing a large amount of money which can go into the millions.

SMSF Commercial Property Loan restrictions

Some lenders may have restrictions on the type of commercial property that can be bought, while other lenders don’t allow renovations. It’s common for lenders to limit these types of loans to ‘standard-use’ commercial properties such as offices and warehouses, and could exclude vacant land.

SMSF Commercial Property Loan tax considerations

The Australian Taxation Office (ATO) has a few requirements that need to be met. These include:

• ‘Business real property’. Under this requirement, the property must be used wholly and exclusively in a business. Farms with a private dwelling on it are still allowed, provided the private dwelling is in an area of land no more than two hectares and the main use of the whole property can’t be for domestic or private use.
• Sole purpose. The SMSF fund must have the sole purpose of being to benefit members of the fund and trustees in the accumulation and retirement phase.
• Arm’s length. Tenants need to be genuine - the commercial property can be rented to a relative but it must be rented out at the market rate (no mates rates!).

SMSF Commercial Property Loan deposit requirements - LVR

Because you are generally borrowing a lot more money, lenders will require a bigger deposit (generally 30% minimum) which is a 70% loan-to-value ratio (LVR). If you’re borrowing for a $5 million property, that would mean stumping up $1.5m for the deposit - no small feat.

There are always exceptions to this rule - some lenders allow an 80% LVR or even 90% LVR.

SMSF Commercial Property Loan fees

Fees on SMSF Commercial Property Loans tend to be substantial and can include the application fee, SMSF review fee, establishment fee, discharge fee, deferred facility fee, valuation fee, documentation fee, settlement fee, and ongoing fees.

SMSF Commercial Property Loan Advantages

• Tax benefits. The income of your SMSF is generally taxed at a concessional rate of 15% which can make it a tax-effective option. Also read: How does capital gains tax in SMSFs works?
• High loan limits. The limit for commercial properties can be up to $5 million, depending on the lender, whereas SMSF residential loans are usually restricted to a loan amount of $1 million.
• High rental yield. Commercial properties (particularly well-located ones) generally attract sky-high rents, which can then funnelled straight back into your SMSF.
• Grow SMSF quicker. Because you may be paying rent to yourself and not a landlord, income generated is funnelled back into the SMSF to increase retirement savings (once the loan has been paid off).

SMSF Commercial Property Loan Disadvantages

• Higher interest rates and fees. SMSF commercial property loans generally attract very high interest rates and lots of fees because of the increased risk to the lender, which can add hundreds or thousands to your loan repayments every month.
• Market volatility. Unlike residential property, the commercial property market is highly volatile and it can take months, sometimes years, to sell or lease a commercial property depending on economic conditions.

FAQs about SMSF Commercial Property Loans

How much can an SMSF borrow to buy commercial property?

Generally, you can borrow up to 70% of the value of a commercial property with an SMSF (70% LVR). Some lenders may allow you to borrow up to 90%.

Can I buy commercial property with SMSF?

Yes, you can buy commercial property through your SMSF. If you need to borrow funds for the purchase, ensure your lender allows for SMSF commercial property investment.

What is the LVR for SMSF commercial property?

SMSF commercial property loans are typically limited to a 70% loan-to-value ratio (LVR), which means a borrower needs to stump up a 30% deposit. However some lenders allow a 90% LVR, which is a 10% deposit.

What is the minimum deposit for SMSF loans?

Many SMSF Commercial Property Loans restrict the borrower to a 30% deposit, however, it is possible to find lenders allowing smaller deposits than this.