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Limited Recourse Borrowing For Commercial Property · My Accounting Advantage

• 0:04
  SPEAKER_00: Hello and welcome back to the podcast My Accounting Advantage.
• 0:08
  SPEAKER_00: My name's Lee Woodward, the co-host, alongside our intelligent, incredible accountant, Mai Harris.
• 0:15
  SPEAKER_00: She joins us again.
• 0:17
  SPEAKER_00: Mai, welcome back to your podcast.
• 0:18
  SPEAKER_01: Thank you so much.
• 0:19
  SPEAKER_01: What an intro.
• 0:21
  SPEAKER_00: Well, we're getting such good feedback at this detailed like last week's episode was so detailed.
• 0:27
  SPEAKER_00: And people don't know what they don't know.
• 0:29
  SPEAKER_00: And for no offense to the accountancy world, they're not bringing these things up.
• 0:34
  SPEAKER_00: It's just I did your books, I did your accounts, find out the rest of it from wherever.
• 0:38
  SPEAKER_00: But if you don't know to ask the question of, has this changed?
• 0:42
  SPEAKER_01: Yeah.
• 0:43
  SPEAKER_00: Can I still do that?
• 0:44
  SPEAKER_00: And I just think last week we just nailed it.
• 0:47
  SPEAKER_00: And then we've got this week, which is going to be you have to explain LRBA to me.
• 0:52
  SPEAKER_00: I thought it was something to do with the Mardi Gras.
• 0:54
  SPEAKER_00: We're going into self-managed super fund borrowing, property borrowing explained.
• 0:59
  SPEAKER_00: What can we expect from today's program?
• 1:01
  SPEAKER_01: This topic comes up quite a lot lately because a lot of people are now wanting to venture into purchasing properties and investments in their self-ministered super fund.
• 1:12
  SPEAKER_01: You know, not just property.
• 1:13
  SPEAKER_01: A lot of people want to look into cryptocurrency and you know other types of investments that are not being supported by the industry funds.
• 1:25
  SPEAKER_01: So they want to actually take control back.
• 1:27
  SPEAKER_01: And you can do that under a self-ministered super fund.
• 1:30
  SPEAKER_00: What's your view on crypto?
• 1:31
  SPEAKER_01: Well, my view on crypto is it's so volatile and uh it's not, you know, an investment that is based on something.
• 1:39
  SPEAKER_01: And I don't know a lot about it.
• 1:41
  SPEAKER_01: So I can't really comment on that.
• 1:43
  SPEAKER_01: But if you ask me, do I have Because it's not real money.
• 1:46
  SPEAKER_00: You're dealing real money and I know and title and commercial.
• 1:51
  SPEAKER_01: Yeah, so that that's the thing.
• 1:53
  SPEAKER_01: A lot of people say, Oh, what do you think?
• 1:56
  SPEAKER_01: And I'm like, Well, it's another form of investment, and it's really fluctuates by numbers, and I don't know what it's based itself on.
• 2:07
  SPEAKER_01: So, yeah, it depends on your risk appetite, whether or not you want to go there.
• 2:12
  SPEAKER_01: And a lot of people have, and a lot of people have made a lot of money out of it, and also a lot of people have lost a lot of money out of it.
• 2:18
  SPEAKER_01: So it's really is up to your risk appetite.
• 2:22
  SPEAKER_00: Very good.
• 2:22
  SPEAKER_00: Well, continue on with what we're doing.
• 2:24
  SPEAKER_01: Yeah, so the outcome from today's session it will be, you know, I'm going to talk about what is the limited recourse borrowing arrangement and what have changed in, you know, the SMSF borrowing world from 10th of August 2026 and why this is important.
• 2:42
  SPEAKER_01: And then now the government also have concentrated on encouraging the SMSF to invest in commercial property and why, and why it is really quite relevant to business owners out there for their investment strategies.
• 2:59
  SPEAKER_01: And then I will also go through the PBS framework before you're moving forward.
• 3:06
  SPEAKER_00: Now, being a podcast that leaves no stone unturned, next week we're bringing in Luke Talbot, who is a SMSF borrowing specialist.
• 3:17
  SPEAKER_00: Because most brokers won't go near this anymore because it's so complicated and it's too hard.
• 3:22
  SPEAKER_00: And I really like that that that segment's coming up as a backup to this one.
• 3:26
  SPEAKER_00: But let's go into segment one of this part of the podcast.
• 3:30
  SPEAKER_00: What actually changed?
• 3:31
  SPEAKER_01: Yeah, so what has actually changed is from the 10th of August 2026, uh, the RRBA arrangement, which is the borrowing under the self-missed superfund, has been restricted.
• 3:45
  SPEAKER_01: So before the change, um, what the SMSF could do was borrow and then purchase residential property, and that is for new as well as existing residential property.
• 4:00
  SPEAKER_01: And it's still eligible to borrow to purchase commercial property.
• 4:06
  SPEAKER_01: That hasn't changed, that rule hasn't changed.
• 4:08
  SPEAKER_01: But what's changed is now um the government stopped the RIBA arrangement for residential just to, you know, restrict that demand from the residential market.
• 4:20
  SPEAKER_00: So the only way you could buy residential real estate today with your self-managed super fund is if you are borrowing the money to the super fund to go and buy a residential property.
• 4:30
  SPEAKER_01: Well, that's another option.
• 4:32
  SPEAKER_01: If you want to lend the money to the super fund to go and buy a well, you can't.
• 4:39
  SPEAKER_01: You really you can't lend the SMSF money to purchase residential property that's no longer available.
• 4:47
  SPEAKER_01: Okay.
• 4:48
  SPEAKER_01: So you can lend the Superfund money if you were to buy a commercial property, real business property.
• 4:56
  SPEAKER_01: So they've closed the door on purchasing residential property using borrowings for SMSF.
• 5:03
  SPEAKER_00: So what about those people who want to buy residential property with their self-managed super fund?
• 5:08
  SPEAKER_01: Well, you can still do that, but you just can't borrow to buy.
• 5:12
  SPEAKER_01: Yeah.
• 5:12
  SPEAKER_01: So if you actually have available funds in your self-managed super fund already to purchase the residential property, well, then you can still do that, but you just got to make sure you have sufficient funds to purchase it outright.
• 5:27
  SPEAKER_01: You just can't borrow under the LRBA arrangement to purchase a residential property.
• 5:32
  SPEAKER_00: What does that pronunciation, LRBA, stand for?
• 5:36
  SPEAKER_01: Yeah, LRBA stands for limited recourse borrowing.
• 5:40
  SPEAKER_01: It's an arrangement that allows the super fund to borrow.
• 5:45
  SPEAKER_01: Why does it call limited recourse borrowing arrangement?
• 5:50
  SPEAKER_01: It's basically to safeguard the super fund's other assets.
• 5:55
  SPEAKER_01: Okay, so if you were to borrow to purchase an investment property, under this arrangement, it capped the exposure to the single asset, which is the property in this case.
• 6:09
  SPEAKER_01: And that's why a lot of banks getting out of this SMSF borrowing space, because that's not enough security for them, because the security is limited to that property only.
• 6:22
  SPEAKER_01: That's why it's called limited recourse.
• 6:24
  SPEAKER_01: Because if you actually can't make the repayment for that property, they can't go after other assets that you have in your self-ness superfund or you.
• 6:35
  SPEAKER_00: How do you set up a facility for this?
• 6:38
  SPEAKER_01: Okay, so in order for you to obtain borrowing under your self-most superfund, it's not like the typical, you know, I just want to go to the bank, borrow money, and then I'll purchase an investment property or just, you know, commercial property.
• 6:53
  SPEAKER_01: You can't do that.
• 6:54
  SPEAKER_01: You need to set up your structure first.
• 6:57
  SPEAKER_01: And that's where sometimes a lot of people went wrong because they think that they can just set up your self-minute super fund, roll your benefits into it, and then just go and purchase an investment property and seek lending.
• 7:12
  SPEAKER_01: No, it's not like that because you need to have separate structure set up.
• 7:17
  SPEAKER_01: And what I mean by structure is that there are four moving parts here.
• 7:22
  SPEAKER_01: Number one, you need to set up your SMSF so you can, you know, establish the entity that you have put your super balance into.
• 7:33
  SPEAKER_01: That's number one step.
• 7:34
  SPEAKER_01: Okay, so that you will have enough for deposit, for example.
• 7:38
  SPEAKER_01: Number two, you need to establish who will be lending you that money.
• 7:43
  SPEAKER_01: So the lender will might be the bank or it might be a related party like you.
• 7:49
  SPEAKER_01: So you need to decide that first.
• 7:52
  SPEAKER_01: So basically, you make a plan on um how you're going to fund this purchase.
• 7:57
  SPEAKER_01: And if you do want to borrow in this case and you already make a decision on, you know, who will be your lender to yourself and superfund, then you need a holding trust.
• 8:11
  SPEAKER_01: And we often refer it to refer to as a bear trust.
• 8:16
  SPEAKER_01: Okay, so you need to establish that bear trust or holding trust so that holding trust can hold the property on the SMSF behalf.
• 8:26
  SPEAKER_01: So the next one is also you need a bear trustee company to be set up.
• 8:33
  SPEAKER_01: So a bear trustee company is a company, a normal company that will act as a trustee of the bear trust so that you can purchase a property.
• 8:43
  SPEAKER_01: And that's how it needs to be set up.
• 8:45
  SPEAKER_01: A lot of people go, oh, that's very confusing.
• 8:48
  SPEAKER_01: It is, and hence why you need to go and get advice before you um implement this structure.
• 8:54
  SPEAKER_01: And then the next thing is then after you have the structure in place or a plan in place, then you need to establish what kind of properties you're going to purchase.
• 9:04
  SPEAKER_01: And um, is it going to be, you know, commercial property?
• 9:08
  SPEAKER_01: And well, it it has to be now because under this, you know, LRBA restriction from August and 2026, you can't borrow to purchase um residential property as we discussed before.
• 9:21
  SPEAKER_01: And so, which means, but there are so many different types of commercial property, and you can look at the you know, residential property that already converted into a commercial use that still qualifies as business real property.
• 9:38
  SPEAKER_01: And um you can look at where a warehouse, you know, or um an office space, etc.
• 9:44
  SPEAKER_00: My just for the simple people of the world, could you give us a simple explanation of that?
• 9:50
  SPEAKER_01: Okay, yes, it is quite a complicated, you know, arrangement that I'm talking about here for SMSF.
• 9:56
  SPEAKER_01: So straightforward down the line, I just wanted to say that, you know, the SMSF is the borrower and the beneficial owner of the property.
• 10:05
  SPEAKER_01: So you just need to establish that bear trust to hold the property on behalf of the SMSF.
• 10:11
  SPEAKER_01: But the SMSF is still the borrower and it's still the beneficial owner of that property.
• 10:18
  SPEAKER_01: So that hasn't changed.
• 10:19
  SPEAKER_01: The holding trust is temporarily hold the legal title of the property.
• 10:24
  SPEAKER_01: So it doesn't do anything, it's just act as, you know, a guardian of that property for the SMSF.
• 10:31
  SPEAKER_01: The lender's recourse is generally limited to the acquired asset, as I mentioned before.
• 10:37
  SPEAKER_01: They cannot go after other assets of the SMSF should you forego, you know, the loan for that property.
• 10:46
  SPEAKER_01: It's basically they can only foreclose and um sell that asset to repay that limited recourse borrowing.
• 10:54
  SPEAKER_01: And that's why often interest is higher on those kind of loans.
• 10:58
  SPEAKER_01: And then the last one is the structure must be correct before the contract is signed.
• 11:03
  SPEAKER_01: So you don't want to into sale contract without all the structures that are in place because otherwise you'll we'll be facing stamp duty problems.
• 11:14
  SPEAKER_00: Yeah, and you mentioned this interest rate.
• 11:16
  SPEAKER_00: Uh as of time of recording today, we viewed some interest rates this morning and we're in the eight percent.
• 11:22
  SPEAKER_00: Don't be shocked by that.
• 11:23
  SPEAKER_00: This is not your residential normal home loan.
• 11:26
  SPEAKER_00: It's gonna be in the eights.
• 11:27
  SPEAKER_00: Let's go into segment three.
• 11:29
  SPEAKER_00: Why are business owners interested?
• 11:31
  SPEAKER_01: Yeah, so it's really is to me uh another way to, you know, uh set up a tax effective structure for you.
• 11:41
  SPEAKER_01: Because when you make super contribution, naturally you're going to get tax deduction for it.
• 11:46
  SPEAKER_01: So why not accumulate, you know, your retirement funds and obtaining tax deduction and then paying off an asset that you already use.
• 11:59
  SPEAKER_01: So, for example, what why is it so enticing for the business owner?
• 12:05
  SPEAKER_01: Is often a lot of business owners are already paying rent to an unrelated landlords and quite a substantial amount of money goes to someone else.
• 12:15
  SPEAKER_01: So if you actually have funds in your self-invest of a fund, review it and see if you have the ability to borrow extra to purchase that space or set up another commercial space so that you can pay rent to yourself.
• 12:30
  SPEAKER_01: So everything comes back to yourself at the end.
• 12:34
  SPEAKER_00: I know so many business owners, myself included, that being the blue chip tenant of our property owned by the self-managed superfund for 15 years was just phenomenal.
• 12:47
  SPEAKER_00: Even in years where the business didn't go good, and then years where it did go well, that was all made consistent by the value of the property at the end of it that we paid off.
• 12:57
  SPEAKER_00: And for everyone listening to it, this for everyone listening today, this is such an exciting way to stay excited about your business that your new goal is yes, we want to have a great business, but if we're paying our own rent to our own building, that's why this business is worth it.
• 13:12
  SPEAKER_01: Yeah, definitely.
• 13:13
  SPEAKER_01: You really build your own value, you know.
• 13:16
  SPEAKER_01: Like just imagine how cool would that be that you are your own landlord and you don't have to rely on, you know, someone else, and you're not at their mercy either.
• 13:27
  SPEAKER_01: You know, if they want to hike your rent or um you have to worry about they're going to sell the building, for example.
• 13:34
  SPEAKER_01: So yeah, you you have full control.
• 13:36
  SPEAKER_01: That that's to me, control is everything and control of your self-discipline, your retirement funds, and also have the control to build your own um value, you know, because that property will become such a valuable asset in in the long run.
• 13:52
  SPEAKER_01: Should you sell your business to someone else, they become your tenant.
• 13:56
  SPEAKER_01: And you're because you have reliable tenant and great rent, great rental um return, then your business premises will be worth even more.
• 14:06
  SPEAKER_00: Maya, I think on today's topic, we're gonna need one of your world-class My Accounting Advantage teaching frameworks.
• 14:14
  SPEAKER_00: Take us through it.
• 14:15
  SPEAKER_01: Yeah, so to help you reframe your understanding and you know, giving you the correct sequencing in walking into SMSF borrowing, I've developed a framework called the PBS framework.
• 14:30
  SPEAKER_01: So, what it means is that num it it's a framework that you should follow when thinking about SMSF borrowing or purchasing in a commercial property under the SMSF and you require that borrowing part.
• 14:45
  SPEAKER_01: So P stands for property.
• 14:48
  SPEAKER_01: So does the property qualified?
• 14:50
  SPEAKER_01: Is it a it would it be qualified for real business property definition?
• 14:56
  SPEAKER_01: And what about the usage?
• 14:58
  SPEAKER_01: Could its use be changed, you know, and then is it the right investment for you?
• 15:04
  SPEAKER_01: Will it give you the right return on investment?
• 15:07
  SPEAKER_01: So number one is to go with P for property, and number two is B for borrowing.
• 15:13
  SPEAKER_01: Okay, so with the borrowing, can the SMSF afford it?
• 15:17
  SPEAKER_01: Can the rent and contribution support the repayment?
• 15:21
  SPEAKER_01: And what happens during the vacancies?
• 15:23
  SPEAKER_01: Can you still service the debt?
• 15:25
  SPEAKER_01: Is there a cash buffer within the SMSF after you borrow?
• 15:31
  SPEAKER_01: And can the fund meet repairs and maintenance, insurances, taxes, and other operating costs of the property itself?
• 15:41
  SPEAKER_01: And the last S stands for strategy.
• 15:44
  SPEAKER_01: Does it improve retirement outcomes?
• 15:47
  SPEAKER_01: So if it doesn't, and you can't see that this strategy will optimize your retirement fund, well, no, you need to reconsider that.
• 15:56
  SPEAKER_01: And is it just concentrating on property only?
• 15:59
  SPEAKER_01: Does it have a strategy in the future to diversify it?
• 16:03
  SPEAKER_01: And can you, if you actually pour all your money into the one property?
• 16:08
  SPEAKER_01: And what if the business closes, move, or outgrows the premises?
• 16:11
  SPEAKER_01: What happened to that?
• 16:12
  SPEAKER_01: So the PBS framework really prepares you for everything from you know choosing the property, what kind of borrowing will be required?
• 16:22
  SPEAKER_01: And what are the strategies to make this happen for you?
• 16:27
  SPEAKER_01: And also not just short term, long term, and in line with your retirement goals.
• 16:33
  SPEAKER_00: Absolutely amazing.
• 16:35
  SPEAKER_00: Property borrowing and strategy.
• 16:37
  SPEAKER_00: And if any of these don't pass the pub test, well then it's not gonna stack up.
• 16:43
  SPEAKER_00: Versus I thought it was gonna be okay, I fought, I fell in love with the property, we went out and bought it, but we got stumbled by.
• 16:51
  SPEAKER_00: And I think you're gonna keep a lot of people out of the potholes here, Mai, because that's a really simple, and simple's difficult, but that's a simple framework that people can follow.
• 17:01
  SPEAKER_00: Take us into segment four of this podcast, which is the four biggest mistakes that people go through with an LRBA.
• 17:11
  SPEAKER_00: That wonderful code.
• 17:12
  SPEAKER_00: What are the the top three mistakes?
• 17:14
  SPEAKER_01: Yeah, it's a bit of a mouthful.
• 17:16
  SPEAKER_01: I I agree with you there.
• 17:17
  SPEAKER_01: So the top number one mistake that people that I've seen people go through is signing the contract before getting advice.
• 17:26
  SPEAKER_00: That is a mistake.
• 17:27
  SPEAKER_01: That definitely is because you married at first sight.
• 17:31
  SPEAKER_01: Oh, that's a that's a funny one.
• 17:33
  SPEAKER_01: Yeah, we signing the contract before getting advice is getting yourself into hot water without even knowing that you are in hot water.
• 17:43
  SPEAKER_01: So it um please don't do that.
• 17:45
  SPEAKER_01: But even when you're thinking about it, get advice beforehand.
• 17:49
  SPEAKER_01: You know, don't just enter into this world of to me, dream of having, you know, an investment portfolio, but go out shopping before you created the structure and getting the right advice before you go shopping.
• 18:06
  SPEAKER_01: So um don't sign the contract, not yet, not until you've got the the right structure in place because SMSF borrowing isn't like any other type of borrowing.
• 18:16
  SPEAKER_01: Mistake number two, assuming the property qualifies.
• 18:20
  SPEAKER_01: So you need to look at the commercial usage of the property first and then make sure that it qualifies under the RBA arrangement ruling, because a lot of people assume that yes, it looks like commercial property, so it should be okay and go out there and start negotiating.
• 18:41
  SPEAKER_01: So yeah, you you you need to seek advice first.
• 18:45
  SPEAKER_01: Num mistake number three, ignoring cash flow.
• 18:48
  SPEAKER_01: Yeah, you this is really important because you don't want the SMSF cash flow to go backwards.
• 18:55
  SPEAKER_01: This is, you know, your retirement fund, your nested.
• 18:59
  SPEAKER_01: So we want to keep moving forward with your return on investment, not going backwards.
• 19:05
  SPEAKER_01: So if the repayment for the loan is so big and the rent doesn't cover it, well, you enter into a negative gearing territory here, which means that you have to make extra contribution every month, for example, to make sure that your SMSFA is able to repay that loan.
• 19:26
  SPEAKER_01: So that's not very good cash flow plan there.
• 19:29
  SPEAKER_01: And that's not how the SMSF should work.
• 19:32
  SPEAKER_01: It should always have cash flow positive in this case.
• 19:36
  SPEAKER_01: Then the last mistake, mistake number four, is putting too much of funds into one asset.
• 19:43
  SPEAKER_01: So it's really highly concentrated.
• 19:46
  SPEAKER_01: So if something happened to that asset, your retirement fund might be jeopardized in this case.
• 19:52
  SPEAKER_01: So always look at diversification strategy to, you know, for example, that's why I always say to people, look, I I don't like it if there's negative gearing in the self-ness super fund, because then it doesn't allow any surface surplus funds to be invested elsewhere.
• 20:12
  SPEAKER_01: So in this case, if we actually have surplus cash in your self-ness superfund from the rent, that's ideal because then we can pick up that cash and invest in something else, like, you know, share portfolio or other things.
• 20:28
  SPEAKER_00: I think we're gonna have to take this one even further.
• 20:31
  SPEAKER_00: And next week, as I mentioned, Luke's coming in, and we're gonna go even deeper, but I'm just really looking forward to a home loan who's in the field every day, seeing people fail, meaning, oh, I've bought this property, get me a loan.
• 20:46
  SPEAKER_00: You don't qualify even as the property, but I've paid my deposit.
• 20:50
  SPEAKER_00: Well, now you're in default of a contract.
• 20:52
  SPEAKER_00: And being in default of a contract is very, very serious loss of money.
• 20:56
  SPEAKER_00: So I think it's really important that we take it to that next level and bring that clarity, and that'll be next week.
• 21:03
  SPEAKER_00: But my wrap is up for today with your beautiful PBS.
• 21:07
  SPEAKER_01: Yes, so PBS, as I mentioned before, it's you know, will help you move forward with the right structure and the borrowing under your self man is super fun.
• 21:19
  SPEAKER_01: And the last thing I wanted to say is that if you are considering purchasing business property through your SMSF, please do not sign the property contract first and ask for advice afterwards.
• 21:32
  SPEAKER_01: That's not wise.
• 21:33
  SPEAKER_01: So please plan ahead and get advice before you do it.
• 21:37
  SPEAKER_00: My Harris, another wonderful week on the podcast.
• 21:40
  SPEAKER_00: Thank you for joining us, and we look forward to speaking to you next week.
• 21:43
  SPEAKER_01: Thank you, Lee.