How To Buy Property With A Self Managed Super Fund

How To Buy Property With A Self Managed Super Fund

Mark Taylor,

Buying property through a self managed super fund, or SMSF, is becoming increasingly popular. So how does it work and what do you need to know about buying property through your superannuation?

Buying property through a self-managed super fund (SMSF) is becoming an increasingly popular retirement strategy. In fact, the ATO reports that 15% of SMSFs are now invested in commercial or residential property. So how does it work and what do you need to know before buying property through your SMSF? 

How Do You Buy A Property Through A SMSF? 

SMSFs give people more control over their superannuation, as they can choose how to invest their money for retirement. 

Starting with the basics, a SMSF can have between one and four members, or ‘trustees’, and must have a detailed financial plan that documents the current and future needs of each member. This investment strategy must account for the personal circumstances and needs of each trustee, including their age and their risk tolerance, which is important to consider when choosing property to purchase.   

When purchasing a property through a SMSF, the property must align with the documented investment strategy of the fund, as well as meet the requirements of the Sole Purpose Test by providing benefits for retirement only. 

Purchasing property as a Limited Recourse Borrowing Arrangement (LRBA) is one of the possible investment options in a SMSF. In an LRBA, the purchased asset is held on trust to be used by the borrower in the future. 

The ownership of properties through SMSFs is highly regulated and subject to strict auditing, so seek advice from a qualified financial adviser before proceeding. 

Benefits Of Investing In Property In A SMSF

As with any investment strategy, there are pros and cons to buying property with a SMSF. Some of the advantages include:

  • In an LRBA, the lender can only seek compensation from the single asset if the loan defaults, meaning your whole super fund is not at risk. 
  • Your super fund will be taxed at 15%, which is lower than most individuals’ personal taxes
  • If the property is sold while the fund is in pension phase, it’s tax-free. Prior to that, the capital gains tax is discounted. 
  • You have more buying power if investing as a couple or family through a SMSF than you would if you only used individual funds. 

Some of the disadvantages include high set-up costs, less diversification and fixed cash flow, so it’s essential to consult a professional about your financial goals before proceeding. 

What Type Of Property Can You Buy With A SMSF? 

You can purchase either a residential or commercial property with a SMSF, but there are important restrictions to be aware of. For a residential property, you cannot benefit from the investment prior to retirement, so your tenants cannot be trustees or relatives. 

For commercial properties, it’s common to lease the property back through your own business, therefore providing a pre-retirement benefit, but there are rules to abide by that make sure the arrangement is fair, including: 

  • The lease must be commercially competitive 
  • You must complete regular valuations of the property
  • All payments must be made in full and on time

The Australian Tax Office monitors SMSFs for compliance and there are harsh penalties for failing to follow the guidelines.  

Before purchasing a property, you should also consider how effective it will be as an investment, including its potential capital growth, risks and rental yields. 

How Much Money Do You Need To Buy Property Through A SMSF? 

There are two parts to the question of money with SMSF-owned properties – how much you should have in super to buy the property and how much it costs to set up the fund itself. 

Before you can think about properties to purchase, there are a number of financial outlays to consider. First, there is a $2,000 fee for setting up the SMSF, ongoing annual costs and fees for the range of experts you’ll need to engage, such as accountants and financial advisers. 

When purchasing property, many experts say it is advisable to have at least $200,000 in your fund to make it a cost effective strategy. Any less than that and it may be beneficial to keep your existing super funds as the fees can often be lower. But you’ll need to do your own cost-benefit analysis. 

It’s important to note that you cannot use your entire super balance on the property purchase, because there must be some left in the fund as a buffer in cash or shares. 

Considering Buying Property Through A SMSF? 

Read our Investor Guide to Self Managed Super Funds and Property, or contact our team of specialists today.

Get the right advice

Subscribe to keep up-to-date with market trends, property alerts and expert insights.

Connect with us