Buying an investment property through an SMSF

November 26, 2023 Anshu Vaidya

Reading time: 4 minutes

Property investment through a self-managed super fund (SMSF) has grown in popularity in recent years. Whilst setting up an SMSF offers greater control and flexibility, it comes with responsibilities and compliance requirements to adhere to that cannot be overlooked.

Here is our guide to investing in property through an SMSF.

Superannuation balance

ASIC recommends an SMSF should have a minimum balance of $200,000 to be cost-effective but this is just a guide. Just remember that $400,000 in your superannuation balance will only contribute towards paying the deposit, government charges etc. Whilst the super balance is critical, this is only part of consideration in buying a property.

Borrowing to buy property through your SMSF

Similar to buying a property as an individual, superannuation contribution and rental income are key to determining how much you can borrow from your lender. Just remember that the first-tier lenders do not participate in lending for SMSF property buyers.

Some lenders also have their own requirements and restrictions, and they vary from one lender to the next. This includes minimum liquidity in the loan amount requiring 5% in cash, postcode restriction in regional areas requiring a higher deposit etc. If your primary motivation is to buy a property, speaking to a mortgage broker is strongly recommended prior to setting up an SMSF.

Click here for helpful tips for selecting the right area to invest in if you are ready to buy.

Power of leverage

Whilst there is no such thing as a free lunch, who does not like to grow wealth using someone else’s money? If you purchase a $500k property and decide to put a 20% deposit ($100k in this instance). Let’s assume the total investment required was $120k including government charges. If the property increases to $530k (+$30k or +6% on the original purchase price), your return on investment would be 25% ($30k price increase / $120k original investment)! This power of leverage has enabled the increased popularity of buying property through an SMSF.

Maintain arm’s length distance

A residential property purchased through an SMSF cannot be occupied or rented by a member of the fund or any of the member’s related parties to remain compliant. You may choose to live in once you retire.

A commercial property, on the other hand, can be rented to a member of the fund or any of the member’s related parties so long as it is leased at a market rate.

The tax considerations

There are several tax benefits to purchasing a property through an SMSF. The maximum tax rate of 15% is applicable for net rental income. Even better, a 10% capital gains tax rate is applicable if the property is held over 12 months. The best part – if you hold the property until retirement, the earnings and capital gains are tax-free. Speak to your trusted accountant for advice applicable to your individual needs.

Renovation and drawing equity

If you are an active investor and looking to buy the worst house in the best street to ‘flip’, you would need to tap into funds available within the super fund and not by the loan. The limited recourse borrowing arrangement (LRBA) for SMSF restricts any significant improvements or renovations.

The same LRBA rule has specific rules that restrict the use of any SMSF assets as security against any other investment. This specifically prohibits the strategy of drawing equity from an existing property to finance another property.

Diversification is key to any investment

If your primary purpose of an SMSF is to buy an investment property, your investment may be heavily weighted to one asset class. Speak to a qualified financial advisor to determine an appropriate investment strategy to reduce risk if things do not go to plan.

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