It is essential to have the necessary cash flow inside the SMSF to fund the ups and downs of investment property ownership.
This SMSF trustee checklist can be useful when preparing to borrow money in an SMSF to purchase a property - the checklist only applies when a loan is being established:
1. Ensure that regular contributions are being made to your superannuation fund. Lenders want to see consistent contributions to the super fund that will be applying for a loan to purchase a property. These contributions need to be at a sufficient level in order to meet the lending criteria.
2. If you are PAYG employed, then 9.5% of your income, along with optional additional super contributions (concessional and non-concessional) will be taken into account when the lender is assessing the SMSF loan application. For self-employed applicants, all contributions made from the business will be taken into account for assessing the loan. It is recommended that members discuss the level of contributions with their accountant or financial adviser.
3. Ensure SMSF balance is above $200,000 with sufficient funds to allow for a deposit of at least 30%, costs associated with the purchase and lender's liquidity buffer.
The liquidity buffer has been introduced by lenders to provide the SMSF with sufficient capacity to cover any unexpected expenses that may arise after settlement of the property being purchased.
4. Age - it becomes increasingly difficult to obtain a loan in your SMSF where members are over the age of 55. The ideal age is under 50 at the time of settlement.
5. Retirement Age - a realistic retirement age is a key factor in getting the loan approved. This included employment type. For example, a solicitor can work beyond the retirement age of 65, whilst a bricklayer is unlikely to be working beyond the age of 65 as it is labour intensive work.
6. Ensure that all company, individual and SMSF financials and tax returns are up to date and showing a profit. The level of profit, along with member contributions, will determine the borrowing capacity of the SMSF.