It is possible to acquire commercial properties using an SMSF. However, the rules that apply to these purchases are more strict than with other asset classes. The requirements involved and the risks that come with investing in commercial properties mean that it’s best to have all documents thoroughly viewed by a knowledgeable professional before moving forward.

What are some of the risks with Buying a commercial property in an SMSF?

When borrowing money to invest in real estate with an SMSF, the bank will be giving you very strict conditions. Here, the property has to be purchased using a Limited Recourse Borrowing Arrangement (LRBA). This agreement gives the lender legal recourse to the asset being purchased, but not to any other assets that the SMSF holds. The LRBA only applies to one property at a time, so if the SMSF plans to acquire multiple properties it will have to obtain multiple LRBAs.

Each investment had to be evaluated to ensure that it is consistent with the strategy of the fund and that it falls within acceptable levels of risk. Some of the risks involved include:

Higher costs – SMSF loans are more likely to have higher fees and cost the buyers more than other types of property loans.

Cash flow – All repayments from the loan will come from the SMSF. The fund is held responsible for having the cash flow to cover payments during the entire length of the loan.

Difficult to cancel – These transactions are very difficult to get out of or cancel if they aren’t set up properly at first.

Tax losses – Any tax losses that come from the property can’t be placed against the taxable income that members receive outside of the fund. Seek advice from an accountant on SMSF tax matters.

No alterations – There are restrictions on alteration and renovation of the property if money was borrowed to acquire it. This includes improvements to the asset to increase its capital growth.

Is the conveyancing process different between residential and commercial SMSF purchases?

Conveyances made by an SMSF will look very similar regardless of the property acquired. However, there are differences between residential and commercial properties.

The purchase process for a commercial property will also be more complex. There will be a longer and more thorough due diligence process, and the funds required for an initial deposit will be higher.

What are the usual Conveyancing Costs?

Buyers and sellers need to be sure that they pay all the fees needed to cover the legal side of a property purchase. These costs can generally be split into two categories: legal fees and disbursements.

The legal fees are what the conveyancer or solicitor charges for doing the work. Legal fees will be between $800 and $2000 depending on the circumstances of the transaction.

Disbursements are the costs associated with third parties that charge for services like special searches. There could be disbursements costs for things like:

  • Title searches
  • Rates and owners corporation certificates
  • PEXA
  • Transfer fees
  • Bank fees

Disbursements are usually between $200 and $500 depending on whether the property has an owners corporation.