Let’s start with the benefits of related party loans.

If you need capital, you can prop up your SMSF using the available equity on property owned outside of super rather than burdening yourself with a third-party loan. The advantages to you are reduced upfront expenses, like the application and legal fees charged by major bank lenders, which can run into the thousands.

Related party loans offer lower interest rates than third-party borrowing. The ATO now approves 0% interest rates for related party loans. That means you receive no taxable income from the arrangement and, consequently, incur no tax on the loan. Related party loans also involve less admin work.

Plus, you can hold the real estate until pension age and pay no tax on its capital growth.

Related party loans offer more flexible repayment terms, which are also easier to modify.

It enables you to get started in the real estate market if there are insufficient funds in your SMSF to buy a property outright.

An SMSF loan can help reduce your fund’s cash flow commitment.

1. Borrowing to buy property can help diversify your SMSF Investment Portfolio. The remaining funds can be put towards savings or directed to further diversifying your SMSF investment portfolio.

As with all things financial, it’s imperative you also understand the disadvantages.

Structuring and drafting the legal deed can be expensive, so be sure to seek professional advice during this initial stage of the process.

1. There may be opportunity fees involved when allocating your cash outside super.

Most lenders will restrict the loan amount for SMSFs looking to invest in real estate to a maximum of 80% of a residential property’s value and a maximum of 70% of a commercial property’s value. Note that product features will differ between lenders.

The exact amount is subject to serviceability (ability to pay for the loan) and your bank’s specific criteria for SMSF lending. Remember, it’s not only about securing the lowest rates but also about product features, such as an offset account.

1. Engage a professional financial advisor to help determine your SMSF’s borrowing power
2. Once your SMSF has identified a suitable piece of real estate, you appoint a trustee to purchase the property on your fund’s behalf. Your accountant can help with this.
3. Your professional financial advisor advises you on the optimal SMSF loan to meet your needs
4. A valuation is conducted, and the loan formally approved (subject to a satisfactory valuation)
5. A settlement is arranged, and the costs to finalise your property purchase are paid from your SMSF, including Stamp Duty, SMSF loan application fees, and legal fees.

Remember, SMSF loans may have a 30-year term, depending on the lender’s criteria. During this time, your real estate will hopefully appreciate in value with your repayments covered by your rent.

Let’s say your SMSF has $100,000 in savings and you wish to buy a $350,000 SMSF property.

You could foreseeably be pre-approved for an SMSF loan of $280,000 at the 80% loan to value ratio (LVR). After you find an SMSF property and sign a contract of sale, the deposit of 10% or $35,000 will be paid from your SMSF.