One of the reasons why SMSFs are the superannuation structure of choice for many Australians is the flexibility they provide to invest in assets not often available to members of larger APRA regulated funds, including industry and retail funds.
Larger super funds are certainly active in holding direct property assets however a member is unable to select a specific piece of real estate to hold within their account. This is where the SMSF comes into its own.

The December 2023 SMSF statistics published by the Australian Taxation Office revealed that 16% of the total assets held by SMSFs are invested in non-residential and residential real property. That represents a total investment of just over $139 billion.

So, what are some of the advantages and disadvantages of having your SMSF invest in real property?

Advantages:

1. Control and Flexibility:

As a trustee of your SMSF, you have direct control over your investment decisions. You can choose specific properties that align with your SMSF’s investment strategy and risk tolerance.

2. Tax Benefits:

SMSFs enjoy tax concessions, including a lower tax rate on rental income (15% during accumulation phase and 0% during pension phase).

Capital gains tax (CGT) discounts apply if you hold the property for more than 12 months.

3. Potential Rental Income:

Owning property within an SMSF allows you to generate rental income. This income can contribute to your retirement savings.

4. Asset Diversification:

Property investment can help to diversify your SMSF portfolio, reducing reliance on other asset classes like shares or cash.

5. Business Premises Investment:

Small business owners or self-employed individuals can purchase commercial property through their SMSF. Property that is used wholly and exclusively for business purposes can potentially be leased to their business on commercial terms.

Disadvantages:

1. Costs and Fees:

SMSF property transactions involve various costs, including upfront fees, legal fees, advice fees, stamp duty, and ongoing property management fees.

Be aware of referral fees that may be paid to professional advisers involved in recommending each other’s services, as these can create conflicts of interest.

2. Liquidity Constraints:

Property is illiquid, meaning it can’t be quickly converted to cash. Your SMSF must maintain sufficient liquidity to cover expenses, including loan repayments and property-related costs.

3. Limited Recourse Borrowing Arrangements (LRBAs):

If you borrow to purchase property within your SMSF, strict conditions apply. LRBAs allow you to buy a single asset (e.g. residential or commercial property) with borrowed funds.

Borrowing adds to the complexity and risk, so seek advice from a licensed financial adviser before undertaking any borrowings.

4. Market Volatility and Property Values:

Property values can fluctuate due to market conditions. Your SMSF’s performance may be impacted if property values decline.

Remember that property is only worth what someone is willing to pay for it.

5. Withdrawal Restrictions:

Funds held within an SMSF cannot be withdrawn until a condition of release is met (e.g., retirement, reaching preservation age, or permanent disability).

Financing for SMSF

If you’re looking to leverage your superannuation to purchase property, the good news is there were changes in 2007 to allow an SMSF to borrow money to purchase an investment asset. Borrowing within a self-managed superannuation fund is a little more complex than a standard family home purchase. Whilst the principals are similar, ensuring the correct structure of lending under an SMSF is crucial to remain compliant with all superannuation, corporations, and taxation laws.  

The team of brokers at Mortgage Express can guide you through the process of arranging finance for the purchase of a property in an SMSF, taking the complexity out of the process and guide you through to settlement. If you are considering purchasing a new property, it’s worth contacting the team of mortgage brokers at Mortgage Express to discuss your options.

Tips for SMSF Property Loans

• Before you start looking for properties, speak with your Financial Adviser to ensure that this set up is suitable for you and you have a strategy to know what type of property your SMSF will benefit from. Together, you must also ensure that the SMSF complies with the Sole Purpose Test, which ensures that the investment is to provide benefits to the members of the fund for their retirement, or for their dependants in the event of the member’s death before retirement.
• Speak to your Mortgage Express broker to arrange a pre-approval prior to looking at property to ensure you have a smooth process. 

In summary, owning property within an SMSF offers control, tax benefits, and diversification. However, it comes with costs, liquidity constraints, and risks. Always seek professional advice before making investment decisions that affect your retirement nest egg.

General Advice Warning: This communication contains general information only and in no way constitutes the provision of professional advice, nor should it be relied on as a substitute for financial, credit, accounting, legal or other professional advice. We have not taken into account your financial situation, investment objectives or particular needs. Before making an investment or financial decision, a person must seek appropriate independent professional advice and also consider whether this information is appropriate to their needs, objectives and circumstances. Mortgage Express Brokers are Authorised Credit Representative of Astute Financial Management Pty Ltd | ACN 093 587 010 (Australian Credit Licence 364253).

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