Blog - Commercial

16 January 2018

WHY MORE AND MORE INVESTORS ARE USING THEIR SMSFs TO INVEST IN COMMERCIAL PROPERTY

Commercial property is considered a safe-haven for investors, with relatively stable growth, low risk and solid returns. In fact, in Sydney, it’s not uncommon to see between 5% and 6.5% net rental yield, compared to less than 3% for residential property.

Based on these figures, it’s no wonder more and more small investors are turning to their SMSFs to invest.

However, the rules around investing through SMSFs can be complicated, so it’s vital to understand the rules and regulations and to obtain professional advice.

Here are some things to keep in mind …

THE BENEFITS

Many of the advantages that come with buying through a SMSF exist for business owners because the option offers:

  • a more tax effective investment over the long-term
  • more direct control over investment decisions
  • the potential to reduce exposure to relatively risky and unfamiliar equity investments.

OPERATING A BUSINESS OUT OF COMMERCIAL PROPERTY PURCHASED THROUGH A SMSF

Woman on computer looking up commercial property to buy

A SMSF fund can invest in commercial property if a member of the fund runs a business in a separate entity. So, naturally, many properties purchased through an SMSF are leased back to a member’s business.

These kinds of SMSF investments must be kept at an ‘arms-length’. This means that:

  1. Lease terms must be competitive – you must pay market rent (no mates rates)
  2. You can’t skip payments – your rent must always be paid promptly and in full
  3. Your asset needs to be valued, regularly – you can read more about valuation guidelines here
  4. Your investment must meet the sole purpose test – the onus is on you to prove that the purpose of the investment is to pay retirement benefits to members.

BORROWING TO INVEST

Man on laptop with checkered shirt looking at the rules around buying commercial property through a SMSF

In 2007, the rules around borrowing within a SMSF became more relaxed, which means members can now purchase assets that may otherwise be outside of their reach.

That being said, borrowing must still be carried out under strict conditions known as a ‘limited recourse borrowing arrangement.’ Limited recourse borrowing can only be used to purchase a single asset and needs to be set up in a way where the bank takes security over the property.

This option can be problematic if other investors are involved. So, if you do intend to borrow to purchase, a good plan could be to use your SMSF to borrow and to invest in a property out of which you run your business.

THE BOTTOM-LINE

Depending on your circumstances, buying a commercial property, particularly strata, through your SMSF can be a great way to grow wealth, especially if you run your own business.

Eric Lundberg of TGC said, “Having sold hundreds of commercial strata suites around Sydney’s city fringe, they certainly appeal as a familiar, tangible and easily managed asset class for SMSFs.”

If you’re thinking about this option, speak to one of the agents at TGC today!

Disclaimer: The information provided in this article is of a general nature and may not apply to any particular set of facts or under all circumstances. It should not be taken as professional tax, legal or financial advice. The information on this site was accurate at the time of posting and we make every effort to keep it current, however, we are not responsible for any outdated material. Readers are advised not to act upon this information without first seeking the advice of a financial or legal advisor.

Date: 16 January 2018 Author: Adam Hennessy
Commercial

About the author:

Adam Hennessy

Adam Hennessy has been involved in the Sydney commercial real estate industry for over 16 years and is Director of Office Services at TGC. After owning Ray White Commercial Sydney Leasing, Adam joined TGC in January 2007 with a mandate to grow TGC’s office services portfolio.

Your details:

Your friend's details:

RETURN TO LISTING You will be returned to your current within seconds
SEND THIS ARTICLE TO A FRIEND
SUBSCRIBE FOR THE LATEST NEWS