SMSF 101: Investing in property via a self-managed superannuation fund

The basics of SMSF property investment

A SMSF is a private superannuation fund that gives trustees – that’s you – direct control over its investment decisions. One potentially lucrative investment option is purchasing property, either residential or commercial. 

However, there are strict rules around this:

• The sole purpose test: The property must be bought with the sole intent of providing retirement benefits to fund members.
• No personal use: You or your family cannot live in or rent a residential property purchased via an SMSF.
• Business premises exception: If you own a business, your SMSF can purchase a commercial property that your business then leases at market rates.
• Limited borrowing: If borrowing is required, it must be done through a Limited Recourse Borrowing Arrangement (LRBA), where the lender’s claim is limited to the property itself.

The pros of SMSF property investment

Unlike traditional super funds, an SMSF allows you to choose exactly where and how your money is invested.

For savvy investors, real estate could present a more stable and secure place to park your hard-earned super than the volatile share market. That’s especially true of late. Property has historically offered a better long-term return.

Plus, SMSFs benefit from concessional tax rates. Rental income is taxed at 15 per cent, and capital gains tax on properties held for over a year is discounted to 10 per cent.

If the property is held until the fund enters the pension phase, then the rental income becomes tax-free.

Investing in real estate via an SMSF also offers greater diversity if it complements other super investments like shares or fixed income, reducing overall risk.

The cons of SMSF property investment

There’s no sugarcoating it. The SMSF investment path can be a complex one. The establishment and ongoing costs can be substantial, including legal fees, audits and compliance requirements.

There are also often strict lending conditions. SMSF loans typically have lower loan-to-value ratios, higher interest rates and fewer lender options compared to standard property loans.

There are also potential liquidity issues. Property is a far less liquid asset than something like shares, making it harder to quickly liquidate and access funds in an emergency.

Then there are the compliance complexities. Think of all the hoops a major super fund needs to jump through to operate legally. SMSFs are just as heavily regulated and if you don’t follow the rules, there are significant penalties.

Mortgage considerations to keep in mind

If you need to borrow funds to invest in property via an SMSF, keep these points in mind:

• Limited recourse borrowing arrangements. The loan is structured so that if the SMSF defaults, the lender’s claim is limited to the property itself, protecting other fund assets.
• Lower LVRs. Most lenders cap SMSF loans at 60 to 70 per cent of the property value, meaning a significant deposit could be required depending on the purchase price.
• Higher interest rates. Compared to standard home loans, SMSF loans generally come with higher rates and stricter terms.
• Loan structure restrictions. SMSFs cannot use borrowed funds for renovations or property development – only for purchase and basic maintenance.

So, is it right for you?

Investing in property via a SMSF can be a great strategy for some. It offers you greater control over your retirement nest egg and financial future. It can expand your investment diversity by putting real estate in the mix. And history shows that bricks and mortar often offer a better long-term return than the share market.

During times like these, when share market volatility is wiping out big chunks of people’s traditional super balances, taking the reins is appealing.

But it’s not for everyone. There are big potential benefits but also some risks involved. Consider the borrowing constraints and compliancy obligations before leaping in.

The good news is that there are experts to help guide you. We can talk to you about your personal circumstances and your goals and assist in navigating the borrowing challenges – and opportunities – on offer to SMSF property investors.

If you’re thinking about using an SMSF to invest in property, talk to us about how it can align with your long-term retirement goals. With careful planning and the right advice, it can be a powerful wealth-building tool—but only if done correctly.

Ready to explore if SMSF property investing is right for you? Contact a mortgage broker today!