Buying property in USA with SMSF - advice urgently wanted

Hello all!
I am looking for some assistance for a property purchase in the US with a SMSF, where financing will be used for the property at approximately a 65% LVR.
As well as just seeking some sanity checking of work already completed thus far. Even just suggestions as to where to learn reliable, truthful advice as searching the internet results in many conflicting answers for every step, even phone calls to different SMSF property specialists results in different and conflicting answers so I would like to clarify everything as correct before proceeding too far.

As I am investing in a smaller state in the US it's quite cumbersome having a lot of this work done and it has taken 5 months now, with my full time university studies starting again in a few weeks at this stage I'll have little to no time shortly and want this finalized as soon as possible as I also work full time and 18 hour days are rapidly approaching once again. Apologies in advance for the 'wall of text' before you here.

Work completed thus far;
The SMSF has been set up completely here in Australia, the ABN set up and the fund is compliant as per searching on superfundlookup, with my work super contributions now being sent to the account associated with the SMSF. The SMSF has had a bank account established here of course, with the funds rolled over from an industry super fund in to this new SMSF account and the trustee has life insurance for the SMSF to be compliant.

The investment strategy in Australia is compliant with the investments the SMSF is interested in doing, US property investment with a loan in a limited recourse lending arrangement from a lender to comply with the relevant SISA section 67.

I have obtained an LLC in the relevant state in the USA, and the FEIN is being obtained presently by a US attorney under the request of a SMSF specialist team in Australia, I shall be calling the IRS directly tomorrow if this has not been finalized to obtain said FEIN as I know this can be completed/expedited rapidly when calling the IRS when the SS-4 has been submitted to them.

Once the FEIN has been obtained I shall travel immediately the US to open a bank account, wire the funds for the deposit across to the US LLC account from the Australian super account and consider that ready for the finance to proceed.

I have had my eye on a particular property, the property value has been obtained to be a fair and true valuation of the property, from past travels to the state over there I already have contacts to rapidly have a tenant in the property, too. I have also found a property manager for when the time has come to rent out the property to the future tenant, the property manager has provided me with an estimation of the property rental return as per their assessment of the property, local market and so on to have a correct assessment of the property rental value for the future tenant.

I already have pre-approval for the mortgage there from a private lender for the property I am interested in. I have had a buyers agent write up a contract which is now ready to sign for the property I am interested in there, too. With 'Good faith money' ready to be wired to the seller's agent in the US for this property once the contract is signed - this then allows me 30 days for closing, the lender needing 10 days for the finance to be available after the contract is signed and sent to them. The pre-approval is in the name of "SMSF Pty Ltd ATF SMSF" as required, and the lender is happy to lend to a SMSF in a limited recourse lending arrangement.

my SMSF specialist is saying that I need a bare trust arrangement for the property ownership as a SMSF seeking finance for the property investment over there. You may be wondering why I'm seeking this clarification and it's to have another set of eyes on the whole thing as well as answer some questions that have been outstanding in my mind, and my inability to find an adequately experienced accountant/lawyer locally to provide such advice on this (however if you have suggestions for such professionals I'm more than open to them!)

It's my understanding that the contract shall be signed and sent to the SMSF specialist who will write up a bare trust for the arrangement.

Now then, the points on which I'm seeking clarification are as follows:
-The contract, should this be in the name of the LLC over there, or in the same name as per the loan, i.e "SMSF Pty Ltd ATF SMSF"? I had thought that it would be under the LLC with the trust document specifying the control of the LLC is under the SMSF hence the confusion, I've been given multiple answers to this depending on the people I talk to.
-Is there an example bare trust document for which I can read and learn a little more about this arrangement regardless? or even just a flow chart as I'm struggling to find any such document on the internet which is rather alarming.
-The bank account over there, should this be under the LLC name? If so what then specifies the SMSF income to the loan officer when the loan officer will be assessing my ability to pay the loan? I'm struggling as to how to explain this whole arrangement to the loan officer in detail when it comes time to obtain the funds during the closing process. My SMSF payments from work presently covers more than the rental repayments for the loan, and the rental income also covers the loan repayments so either way the SMSF shall have the ability to pay the loan, however expressing this in clear terms to the lender worries me hence seeking more detail.

 

Slow down there buddy you will need some complex legal advice on this. Firstly a smsf is prohibited from borrowing directly. A trustee can hold the property on trust for the smsf. But the trustee will need special terms in the loan. Agreement and mortgage so that the lender has no recourse to the other assets if the smsf.

A smsf could own shares in company which owns the property. But this company cannot mortgage the property unless the smsf doesn't control it.

In my view what you are proposing to do has a slim chance of being compliant.

Ivan from redwood may know how you could do it safely.

 

Wont comment on the loan aspect ???

When buying the property in US contract should be in the name of the LLC, I believe SMSF is 100% member of this LLC? professional needs to confirm this as ? but my understanding.

Bank account needs to be in the name of the LLC purchasing the property.


Just a side question - Who provided the valuations? Have you viewed comparable sales? and your interest rate on the loan if you care to share?

 

Hi Terry,
I'm actually going through Ivan at the moment but he's quite the busy man understandably hence seeking other advice here or perhaps an advisor to assist with this process/speed things up a little so I'm not still trying to plan for traveling whilst also searching for another property, studying and working in a months time, being on call 24/7 and a number of other things in my life that would normally give me no shortage of things to do until uni holidays are once again upon us.

So to cover what you've mentioned the loan is to the trustee i.e the pre-approval issued to SMSF Pty Ltd ATF SMSF, with the lender happy to issue the loan to the trustee of the SMSF based on the equity of the property being purchased, super contributions available monthly, rental return of the property and so on. I just wanted to make sure my understanding of this arrangement is 100% spot on in order to convey all of this whilst in the closing process in the future. The loan is also a limited recourse loan as is required.

So perhaps this is one of the fundamental missing pieces in my understanding of this arrangement and I can google using some better key words to find some answers.

Apologies for my perhaps terse understanding of all of this as it's quite complex and completely out of my usual element of engineering/computing .

 

That was my understanding and at this stage I'd had the contract written up with the LLC rather than the trustee, however the buyers realtor is happy to change this as required now or even during the closing period of 30 days.
From the few other SMSF specialists I'd called they all gave this answer so far so I'd hope it is indeed correct.

The bank account is planned to be in the LLC name, I've viewed comparable sales over the last few months now since September of last year when I'd first become interested in investing in the area, most properties are sold within a very short time period hence my eagerness to put forth an offer on the property, sign the contract and close in order to finalize what I believe is a good property given the ease of finding a tenant in the area for me, the popularity of property sales in the area.
The valuation is to be completed by the lender during the closing process as well as by myself knowing a senior realtor in another realty company there having a valuation done by his professionals prior to the professional required inspections (depending on the year of property - DIHLR for rental, house inspection to confirm information from seller, well/septic inspection if required in certain locations and so on) and after another friend inspected the property in person and a quick comparison is done between the property price online and the Zillow valuation as part of the vetting process I've done while browsing properties in the region. It's actually been immensely helpful having friends in the area from past travels to help out with the many things and I'd be lost without their kind assistance.

Loans are rather difficult there unless you're looking at the most popular states, having contacted some 70+ lenders in regards to my needs to find this lender now. Hence if you don't have 2+ years of bank statements for the LLC bank account (difficult as it's my understanding that you need a different LLC for each property), as well as past US tax returns as a foreign national seeking this complex an arrangement you're looking at 7%+ for interest rates so cash is far better, or a plan to pay off the loan as I have with extra contributions to be free of finance in a relatively short time.

 

That is good you have friends on the ground to help you out, I would not want to see you get ripped off

Be wary of property management services in US, its taken me some time before I got this one sorted. Any chance that one of your friends could management it for you and you pay them a fee?

 

I do have friends of friends there in property management too, however I am wary of not breaking the arms length ruling, hence seeking another property manager independent from me in any way.

I'm not sure if this is the more sensible option or if I'm going overboard by completely avoiding any ties to a friend there at the moment for the management of the investment or not but time will tell.
The property manager I wish to be using has fantastic reviews everywhere I look, are extremely open and honest about all of their charges and extremely good with providing an online management platform for invoices and so on. Both the reviews from tenants and from owners is flawless which is quite surprising.

If this fails however I shall indeed go with a friend of a friend there, I guess one of the benefits of investing in a smaller town is that everyone seems to know a person in each profession from my experience so far.

What problems have you encountered with property managers so far?

 

Hi Jack its Ivan here.

Never too busy.

Refer to attached. Buying Property Overseas (US Property) - Redwood Advisory SMSF

A bare trust is required for any borrowing to buy property within an SMSF - this is standard and we do heaps of these. In regards to the USA, as I have mentioned to you and the many who call Redwood about US Property, you can invest at your own risk. The Loan must be a limited recourse loan which you have mentioned you have sourced and the loan must be in the name of the SMSF Trustee ATF SMSF. I have mentioned that the previous lender who done many loans for SMSFs in Australia did not have compliant loan agreements and I had a massive issue with them. If you invest in the states - it is with caution. Do your due diligence as I have mentioned to you and all clients.

The bank account must be with a ADI as I have discussed and highlighted. The property may be in the LLC name however there must be a declaration of trust to satisfy s52 of the SIS Act. Generally they will register the property in the LLC name and the bank account will be associated with the LLC.

This is general advice only and cannot be construed as legal advice. If you would like another set of eyes, call DBA Lawyers.

Hope that helps. Jack.

Cheers Redwood.

 

Jack - you can employ a property manager who is a friend - as long as they are not a relative or family member.

Cheers Redwood

 

Cheers Ivan that answers all questions completely, you are without question the man to talk to. I shall review S52 of the SIS in detail in regards to the trust to brush up on my own knowledge.

I hadn't realize a previous lender wasn't compliant in loans and caused major issues, I can't imagine how that could be resolved from my reading thus far on non compliant loans.

I'll also contact DBA lawyers to have them cast an eye over the loan to confirm compliance. Thank you for the suggestion as it's better to be safe about this whole thing to avoid major issues in the future as there are another few lenders available as required. I understand it's not legal advice you're providing too.

 

This transaction sounds horribly complex with lots of opportunity for things to be screwed up.

 

Over charging maintenance.
I started buying in 2011 I well and truly sorted this problem out but it took 3 property managers to get it right.

 

There are probably a few ways to structure this

The LIC can act as custodian trustee for the SMSF. The property can be used as security for the loan, but the lender cannot have recource to ther assets of the trust.

The SMSF owning shares in the LIC. With this the LIC cannot borrow and the SMSF cannot borrow to acquire the units

A Custodian trustee owning shares in the LIC with the SMSF borrowing to acquire these units, but the LIC cannot give a mortgage.

etc

see
Legal Tip 147: 5 Different ways a Superfund can own property https://www.propertychat.com.au/community/threads/legal-tip-147-5-different-ways-a-super-fund-can-own-property.13971/

 

it is a highly complex area and i actually dont take on any clients who have such a structure. the risks of something going wrong are far too high in my opinion and unless you are charging high fees the time spent on it just isn't worth it. my experience has been once you start quoting the fees involved people run.

good luck ivan if its an area you have ventured into. now i know who to refer people across to when im asked.

 

My biggest concern is that US tax law treats the owner of the property as a resident US taxpayer and also as a non-resident trust. The IRS HATES bare trusts and in fact any trust and as soon as its evident that there is a non resident beneficiary which is another offshore trust (a smsf is a trust as far as IRS is concerned) - They are viewed as a non-compliant structure by IRS and serious tax outcomes occur.

Same applies using a widely held trust. It can borrow and do all these things too and its a easier and cheaper way BUT it hits the IRS wall too.

I have seen a few variants and havent found a truly compliant one under US law yet. What seems ok for SIS is justa part of the story. Wait till you sell. The US withholding tax wont get credited !!

 

I just sold a US property not in SMSF but non the less the member was my Australian Trust, we did not pay with holding tax.
My US accountant worked out what my IRS liability was in terms of CGT a variation was made by US accountant to IRS my property lawyer processed this no issues whatsoever.

If your Australian Trust is a member, and you personally are the beneficiaries you will be taxed individually and have an ITIN number. It must be transparent.

I leave it up to the experts, its very complex but been playing in USA since 2011 and have made sure that I get US accountants involved who liaise with my Australian accountant.

This is way too complex and important to be getting advice on a forum, penalties in US are severe if you get it wrong.

MTR

 

I am inclined to agree. I know everyones risk preferences are different but I want my supperannuation to be set and forget from a compliance/admin point of view.

I know a lot of Somersofters are going gangbusters on US property and I admire their skill, but having currently lived in the US for the last 18 months, I would not buy an investment property here if you paid me...

 

If it sounds too good to be true it probably is....

I have seen some really horrible outcomes from people buying what appeared bargain property in the USA. After the GFC a lot of distressed poor quality property flooded the market and some if its still emerging (from floodwaters in New Orleans). And those $50,000 US homes do really exist. But the reality is its likely worth far less than the $50K you pay for it. And if you think a $50K property will earn $200 a week rent (20% return) why arent locals queuing up to buy at a mortgage rate of just 4.5%...Effectively buy it in place of rent for just $40 a week !! The numbers dont make sense. Unless a spruiker tells their story and then you are actually buying a gem. Best tip I can give is to buy a ticket and fly out there and walk the streets in question yourself. I did that in September - I didnt expect to be wrong about what a $50K california home looks like but even my wife said - Lets get out of here. Its was a developer selling off derelict ex airforce homes needed renovation (with a dozer). In a virtual ghost town and we were told by a local they have been like that since 1999. What the developer said - Soon to be released estate with private gold course at the door.

Hawaii Street : https://www.google.com.au/maps/@34.5764107,-117.3584824,945m/data=!3m1!1e3?hl=en


For any SMSF planning to touch US property I would be asking how the trustee seeks to manage currency risk. The fall from parity in 2009 to 73cents is where profit has been made by the few who still sell the story of riches in the USA. Ask yourself - If these properties are such a bargain why arent americans queueing up to buy them ?

 

looks like a town of 50 people !!! the middle of nowhere. has an airport though

 

The town is approx 2 miles away and is very large (Victorville Pop 120,000). Yes that "dev" adjoins a former usaf base. Now used as a desert storage facility for Qantas, Virgin, BA and many others and a busy test centre for GE (turbines), Pratt Witney, Boeing and Airbus all test new aircraft mods there which was part of reason I was there.....50 jumbos parked up and many smaller jets the day I was there. Victorville is where jets go to be sold rather than parted out. Qantas are in good demand. Massive industry going in around it like Snapple, Rubbermaid, DHL, Mars (M&M and petfood - gross that they share same building !) and Dr Pepper, etc. Thats part of its attraction - employment. Oh and a huge jail so the locals dont have to travel !!

But its a pimple on a bum. The pic says it all really.