In order to create long-term wealth, investing in real estate in Adelaide may be an option. However, the type of financing used will impact your ability to achieve this goal. There are significant differences between standard investment loans and SMSF loans which you should consider prior to making a decision regarding either type of loan.
How Property Investment Loans Work
An investment loan is the standard type of loan that a borrower takes out to purchase a home that they plan on renting out. The lender will look at your financial situation, including how much you make (income), what you spend on a regular basis (expenses), what you owe (debts), what you have saved (deposit) and your past payment history (credit).
With property investment loans in Adelaide, borrowers have multiple options when choosing a loan, including variable/fixed rate loans, interest-only loans, and offset accounts. Ultimately, the best structure for each investor is dependent upon their financial situation, investment strategy and the amount of risk they are willing to take.
The flexibility of these types of loans is generally greater than those provided by SMSFs, although some lenders will have different requirements for investment properties versus owner-occupied properties.
What Makes SMSF Loans Different?
The purpose of an SMSF loan is for a self-managed super fund to acquire an investment asset such as real estate. The real estate will be held in a unique trust structure until the loan is fully repaid.
SMSF loans Adelaide will have additional legal and lending requirements. The Fund must be compliant with Superannuation Law and the Property must fit into the Funds Investment Strategy. For the majority of cases, the Loan will utilise a Limited Recourse Borrowing Arrangement (LRBA), which will restrict the Lenders Rights should the Fund default.
SMSF loans can also involve:
- Higher setup and ongoing costs
- More detailed documentation
- Restrictions on changing or improving the property
- Limited lender choice
Key Differences to Consider
The biggest difference between the two types of loans is the party borrowing the money and how they hold the property. A typical investment loan allows you to acquire the property in your own name or as part of a different entity. On the other hand, an SMSF loan will allow your fund to acquire the investment as a separate holding trust.
The amount of money you are able to borrow can vary greatly depending upon whether you decide to use a personal investment lending option or a Self Managed Super Fund (SMSF) lending option. Your ability to get a loan with a personal investment lending option will depend on what you earn as well as other obligations that you currently have. On the other hand, the ability to obtain a loan using an SMSF lending option will depend on the current financial status of the fund, as well as the anticipated rental income from any property that the fund may purchase. By reviewing both of these options prior to applying for either type of loan, you can reduce the likelihood of experiencing delays in obtaining approval for a loan, as well as determine which loan structure would be most appropriate for your individual situation.
Lenders who assess property investment loans in Adelaide will look at your own personal financial situation, as well as the anticipated earnings from the property. In addition to reviewing these aspects when assessing SMSF loans in Adelaide, lenders will examine the SMSF’s current balance, its contribution history, the SMSF’s investment strategy, and compliance documentation.
Get Advice Before You Borrow
Both forms of loan may be used to finance an investment in real estate, however, they have very different purposes. Prior to deciding on a specific type of loan, compare interest rates, fees, repayment periods and how each will affect your taxes. You should consult with both a mortgage broker and either a certified financial planner or certified public accountant to determine which form of financing would best suit your financial objectives and individual situation.