What to consider before buying property with your SMSF

One of the benefits of a Self-Managed Super Fund (SMSF) is the level of control they provide. Unlike a retail fund or industry fund, where you have little control over where your hard-earned money is invested, with an SMSF you have the option to choose and actively manage your investment strategy.

SMSF investing is relatively flexible, ranging from term deposits and cash management accounts, to managed funds and listed Australian shares. But, what about an investment in property?

You can indeed purchase property through your SMSF, however it’s important to keep the, long-term impacts, rules and regulations that come with this type of SMSF investment, front of mind.

Like with all investments, there will be certain risks involved when investing in property through your SMSF which is why it’s important to seek advice from a professional financial adviser, before making an investment decision, to ensure the investment is fit for your circumstances and risk appetite.

If you’re thinking about buying property through your superannuation, here is some of the need-to-know information that may help you in weighing up the risks and rewards.

Considerations when buying property through an SMSF

1. Your chosen property must meet the ‘sole purpose’ test

When choosing an SMSF property, the property must meet the ‘sole purpose’ test, in that it’s purpose is solely to provide retirement benefits for fund members. Therefore, yourself or your family members cannot live in the property, it can’t be rented to any related parties and you can’t transfer a residential property that you already own into the fund.

2. Costs of buying, selling and owning property

While not specific to buying property through your SMSF, direct property ownership attracts a number of fees and charges when buying, selling or for ongoing maintenance. While often, the cost is worth the reward, the impacts of these on your superannuation balance need to be considered.

3. Restrictions on Limited Resource Borrowing Arrangements (LBRAs)

Depending on whether you plan to purchase the property outright or with the assistance of a loan, keep in mind that SMSF property loans tend to be more costly than other property loans, and have very strict borrowing conditions. These may include:

  • Loan repayments must be made from your SMSF, meaning your fund must always have sufficient liquidity to meet these repayments.
  • Once your SMSF property loan has been set up, it can be extremely difficult to unwind. Instead, you may need to sell the property, resulting in potential losses to the SMSF.
  • If there are any tax losses from the property, they may not be offset against taxable income outside of the fund.
  • If you’re thinking about renovating the property, do your research. Often, until the SMSF property loan has been paid off, no alterations can be made that change the character of the property.

4. Restrictions that come with owning property

When it comes time to draw a pension from the fund, there needs to be cash flow there to allow for that. As a ‘bulky asset’, property does not always provide the liquidity needed. You may sell the property when members reach retirement, but this may not be ideal depending on market conditions or the state of the mortgage.

5. Changes to legislation

Like with all market chatter, it’s important to stay up to date with the legislation and rules and regulations around SMSF investing. Changes to legislation in the future could impact negatively on those who hold property within their SMSF.

6. Portfolio diversification

If your SMSF’s only investment is property, your portfolio could be lacking in diversification. By relying solely on property, you may face increased risk, while overlooking the long and short-term rewards on offer within other investment types. To ensure your building a balanced portfolio that meets your needs, its best to consult a professional financial adviser.

Should you buy property within an SMSF?

Just as there are risks, investing in property with your SMSF can come with its benefits such as tax effectiveness or funding the purchase of a business premises. However, when it comes to making an investment decision, it’s important to weigh up the potential risks as well as rewards and always consult your financial adviser.

For more on your SMSF, check out if you could be making a Self-Managed Super Fund mistake.

Further, the report highlighted that opting for alternative investments – such as managed funds – may also be a factor. According to the Capgemini Asia-Pacific Wealth Report 2017, Asia-Pacific HNWIs had the highest return globally on investments held by wealth managers at 33% versus 24.6% for the rest of the world (3).

However, it’s important to keep in mind that the recipe for success is not the same for each investor highlighting why consulting a financial adviser, to ensure your investment decisions are right for your circumstances, goals and appetite for risk, is essential for your investment strategy and life plan (link).

Are you looking to build your wealth? While we can’t offer you’re a get rich quick solution, check out 4 ways you could boot your monthly income or why a managed investment like a mortgage trusts are an alternative first step for property investors.

The material on this website is intended only to provide a summary and general overview on matters of interest.  Trilogy does not provide self-managed super fund or investment advice, and readers should note that the above should not be relied on as it is intended to provide background information only.  Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.

Jump To Top