The federal government’s decision to ban the use of limited recourse borrowing arrangements (LRBA) to purchase residential property inside an SMSF has seen a rapid shift from trustees toward using this type of gearing for commercial property investments, according to property investment company Access Wealth.
“The lending change hit hard at first, but it also accelerated a conversation we were already having with clients,” Access Wealth managing director and founder Dory Senior said.
Commercial property can be attractive to SMSF investors because of its typically higher rental yields and the potential to reduce debt faster. There is also the ability of the asset to then provide rental income into retirement.
“Between rental yield and super contributions, many commercial assets can potentially be debt-free in 10 to 15 years, putting investors in a position to hold an unencumbered income-producing asset as they approach retirement,” Senior noted.
He pointed out a number of factors make commercial property attractive, including the lower entry price points available in commercial and the ability for income stability via rental guarantees.
Further, he revealed Access Wealth is currently sourcing commercial property assets for as little as $500,000 to $800,000 and acknowledged the lower entry price also leaves more liquidity inside an SMSF.
“In commercial, a rental guarantee is sensible. It gives investors certainty during the initial lease-up period, which is where vacancy risk is highest,” he explained.
According to Senior, vacancy is the biggest variable in commercial property investing and requires more planning and modelling than it does in residential property.
“You can’t rely on best-case scenarios, which means you need buffers, conservative assumptions and a clear understanding of cash flow,” he confirmed.
He suggested investors need to ask themselves whether the rental income and long-term growth potential of a commercial property asset outweigh the costs and risks of holding it over a 10 to 15-year period.
In addition, he recommended investors speak to financial advisers specialising in SMSFs to ensure any purchase fitted within their investment strategy.
