A Complete Guide to Buying Property with a Self-Managed Super Fund (SMSF)

Table of Contents
    Add a header to begin generating the table of contents

    Self-managed super funds (SMSF) are becoming an increasingly popular way to invest in property. But what are they, and how can you use them to buy a property? This article will explain everything you need to know about SMSFs and buying a property with them.

    We'll cover the basics of SMSFs, the rules around how they can be used for property investment, and some of the pros and cons of using an SMSF for property investment. So whether you're thinking of setting up your SMSF or want to learn more about how they work, read on!

    Are you considering using a self-managed super fund (SMSF) to finance the purchase of a piece of real estate? If such is the case, you should start by reading this tutorial. In it, we will describe the procedure of purchasing real estate with an SMSF and highlight some of the benefits and drawbacks of making such a purchase.

    You should have a strong grasp of whether or not purchasing a home with an SMSF is right for you by the time you reach the end of this article.

    When it comes to buying property, there are many different options to choose from. However, if you're looking for a way to get into the property market that offers a range of benefits, then purchasing property through a self-managed super fund (SMSF) may be the right choice for you.

    In this article, we will walk you through all you need to know in order to purchase property using a self-managed super fund (SMSF). Everything from the fundamentals of SMSFs to the steps involved in purchasing property will be covered in this course.

    Continue reading in order to obtain all of the information you require, regardless of whether you are just starting out or have been considering the purchase of property through your SMSF for some time.

    The creation of self-managed super funds, often known as SMSFs, has been on the rise in recent years as a growing number of individuals explore for new strategies to diversify the holdings in their investment portfolios. Many people find this to be an appealing choice since it gives them more authority over the management of their funds for retirement.

    However, there are a few things that you need to be aware of before you purchase a piece of real estate using an SMSF. In this article, we will demonstrate how to get the most of your SMSF property acquisition by taking you through the process step-by-step and showing you how to maximise its benefits.

    Read on to learn everything you need to know about purchasing a home using a self-managed super fund, regardless of whether you are just getting started with SMSFs or you already have some experience with them.

    Taking charge of your retirement funds by establishing a self-managed super fund, often known as an SMSF, is a fantastic option. However, were you aware that you can also utilise your SMSF to acquire a house as an investment? In this post, we will go over everything you need to know in order to purchase a property using a self-managed super fund (SMSF).

    In this article, we will discuss the benefits and drawbacks of this investment opportunity, as well as some essential considerations to keep in mind while making a purchase. Read on if you are considering making a real estate purchase with your self-managed super fund (SMSF).

    If you are thinking about using a self-managed super fund (SMSF) to purchase a property, it is imperative that you have a thorough understanding of the procedure and everything that is involved.

    This book will walk you through each stage, from determining whether or not investing in SMSF real estate is the best option for you, to locating and financing a property, to maintaining the property once you have purchased it. If you follow these pointers, you should be able to arrive at reasonable conclusions and have a positive experience investing.

    So let's get started!

    What exactly is a Self-Managed Super Fund, sometimes known as an SMSF?

    Simply put, a self-managed super fund (SMSF) is a retirement savings account that you control yourself. Self-managed super funds are starting to gain popularity in Australia, despite the fact that the majority of Australians still use a super fund managed by a third party (such as Cbus, Hesta, or Australian Super, to mention just a few).

    The Australian Taxation Office (ATO) estimates that there are currently more than 1.1 million people across the country who are members of self-managed super funds. To the contrary, just like with a traditional superannuation fund, you won't be able to get at the money you have stashed away in an SMSF until you reach the formal "preservation" or retirement age.

    A Self-Managed Superannuation Fund (SMSF) may have as many as four individual members, all of whom must be trustees of the fund. Therefore, every member has an equal say in the management of the finances, and every member is equally responsible for ensuring compliance (including keeping detailed records, organising insurance and managing regular audits).

    When you have a self-managed superannuation fund (SMSF), you have more choice over how your retirement assets are invested, and you also receive certain tax benefits that aren't offered by other types of superannuation businesses.

    Despite the fact that this may have a very alluring sound to it, it is important to keep in mind that SMSFs come with a high level of responsibility to ensure that everything is managed in the appropriate manner.

    Can I purchase an investment property with my SMSF?

    Can you invest in your superannuation in this way? The answer is yes, and a rising number of people are making the decision to do so. But before you go out and start looking for an investment property to buy, there are several rules and limits pertaining to self-managed super funds property investments that you will need to be aware of.

    Investing in real estate on behalf of a self-managed super fund must, above all else, be done with the sole intention of providing advantages to members after they reach retirement age.

    What are the guidelines for using a Self-Managed Super Fund (SMSF) to purchase an investment property?

    Rules for the Investment of Self-Managed Super Funds in Property – If you intend to use a Self-Managed Superannuation Fund (SMSF), in order to buy an investment property, you are required to comply with the following regulations:

    • Pass the "sole purpose test," which states that in order for members to benefit from the acquisition, they must first have reached the age of retirement.
    • You are not permitted to purchase the investment property from somebody who is linked to either you or any of the trustees.
    • The trustees of the SMSF are considered "related parties," hence none of them or their families are allowed to live in the property. If a person is related to a trustee in any way, regardless of how distant that connection may be, they are not allowed to dwell in the property. This prohibition applies even if the relationship is only distant rather than direct.
    • The trustees, their families, and any other "connected parties" are not permitted to rent the property in question. This is especially the case if the residence is rented out on a seasonal basis for vacations or other short stays.
    • You are unable to put any investment property that you currently own into the SMSF since it is not allowed.
    • In view of these laws, if you buy a residential investment property through an SMSF, your one and only true choice is to rent it out to an unidentified third party. This is the case even if you intend to live in the home yourself.

    What expenses are involved in using a Self-Managed Super Fund (SMSF) to purchase an investment property?


    When purchasing an investment property through an SMSF, just like any other property transaction, there will be certain upfront expenditures as well as recurring costs that you will need to take into consideration.

    Even if money from your retirement account balance can be used to pay for these charges, you will still need to ensure that your future income will be sufficient to meet these expenses while also allowing your account to grow. In most cases, one will be required to pay the following costs when using an SMSF to purchase an investment property:

    • Legal costs
    • Stamp duty
    • Upfront purchase costs
    • Professional advice fees
    • Bank fees
    • Property management fees

    Can I use some of my own money to pay for some of these expenses?

    Any trustee member is permitted to spend their own money to cover the costs of an acquisition; however, it is essential to be aware that doing so is considered a personal contribution to the beneficiary's retirement account.

    In addition, you won't be able to reimburse yourself for your personal contribution to your retirement fund once the SMSF investment property begins bringing in money. Therefore, regardless of how much of your own money you choose to invest in the purchase, you will not be able to receive a return on that money until you reach the age of retirement.

    Can I get a loan to buy an investment property for a Self-Managed Super Fund (SMSF)?

    It is possible for self-managed super funds to take out a loan in order to purchase investment property. The Limited Recourse Borrowing Arrangement is by far the most typical and popular method (LRBA). A loan from a third-party lender can be obtained by the trustees of a self-managed super fund if the fund uses an LRBA.

    The investment property is purchased using the money from the loan; however, the ownership of the property is held in a separate trust. According to the terms of this agreement, the SMSF bank account will receive a portion of any income that is earned from the investment property. Similarly, the income from the same account is used to pay for all of the property's expenses.

    However, if the SMSF were to default on the loan, the lender's only option for seeking remedy would be to pursue it against the property that is held in trust. In the event that a loan default does take place, this guarantees that the SMSF's other assets will be safeguarded against loss.

    What requirements must a Self-Managed Super Fund (SMSF) meet in order to borrow money?

    For the most part, lenders have more stringent borrowing requirements for the purchase of an SMSF investment (compared with an average home loan).

    It's possible that the recurring fees of an SMSF property investment loan will be higher than those of a standard mortgage. In addition, the majority of financial institutions require that the SMSF have a balance of at least $200,000 before they will consider approving financing for the fund.

    Because the criteria that individual lenders use to qualify borrowers can differ, it is important to consult with a mortgage broker before establishing a self-managed super fund (SMSF) with the intention of buying investment property.

    Our knowledgeable investment mortgage brokers will be able to provide additional information on specific borrowing criteria that applies to your situation and answer any other questions that you may have relating to LRBA and loans for SMSFs. They will also be able to answer any questions that you may have regarding specific borrowing criteria that applies to your situation.

    Taking out a loan to invest through your SMSF

    When you borrow money from your retirement account to buy a home, you are subject to some very stringent borrowing requirements. Because the loan to value ratio (LVR) for an SMSF is significantly larger than that of a residential property, you will be required to provide a deposit of somewhere between 25 and 30 percent.

    This is due to the fact that lenders view it as a greater risk; they want to ensure that you acquire the appropriate property and prevent you from losing your retirement savings. It's possible that the lender will additionally require that you have savings equal to five percent of the value of the property.

    The following are some more important aspects to take into consideration:

    • The interest rates on SMSF property loans are typically higher than those on other types of loans.
    • Cash flow: Your Self-Managed Superannuation Fund (SMSF) must pay back any loans. To be able to make the required loan repayments, your fund must at all times have adequate liquidity or cash flow.
    • It is difficult to cancel the arrangement since, if your SMSF property loan documentation and contract are not set up appropriately, you will not be able to get out of the agreement. It is possible that you will have to sell the home, which could result in significant losses for the SMSF.
    • Possible tax losses You won't be able to deduct the tax losses from the property from the taxable income you bring in from sources other than the fund.
    • No improvements to the property are allowed until the SMSF property loan is paid in full. Until then, you are not permitted to make any changes to the property that would significantly affect its appearance.

    What are the drawbacks of using a Self-Managed Super Fund (SMSF) to purchase an investment property?

    It is imperative that you conduct a thorough analysis of all of the potential benefits and drawbacks of using an SMSF to purchase an investment property before you make your final decision. The following are some of the potential drawbacks of using an SMSF to purchase your investment property:

    • Increased costs: When compared to a standard mortgage loan, the interest rates and expenses associated with a loan for a self-managed super fund property will often be higher.
    • Managing cash flow: The bank account belonging to the SMSF will have to be used to make the necessary loan repayments. This indicates that you will be responsible for ensuring that there is always an adequate quantity of money available in the fund to meet the monthly repayments.
    • Difficult to terminate: If there are any problems with the loan contract or paperwork associated with your SMSF (such as an erroneous setup, for example), it may be impossible to rectify those problems without first selling the property, which may cause your SMSF to lose money.
    • Tax constraints: If you have an investment property held in an SMSF, you won't be able to deduct property tax losses from your individual taxable income.
    • Renovation restrictions: There are limitations placed on the ability to make improvements to an investment using SMSF property loans. This indicates that until the loan has been completely returned, there is a possibility that your ability to improve the home will be limited.

    What are the advantages of using a Self-Managed Super Fund (SMSF) to purchase an investment property?

    In spite of the concerns mentioned above, there are still many positive aspects associated with using a self-managed super fund to purchase an investment property. These are the following:

    • Reduced capital gains tax (CGT): If you sell an asset in Australia, you are obligated to file and pay capital gains tax in accordance with Australian tax legislation (like real estate). However, if you have an investment property held in an SMSF, the capital gains tax that you are subject to is capped at 10% even if you decide to sell the property before you retire. If you wait until you are of retirement age to sell the investment property, then you won't have to pay any capital gains tax on the profit at all.
    • Boosted retirement savings: Your superannuation fund might increase more quickly if it has an investment property held in an SMSF. This is due to the fact that you will have growth in your capital as a result of the increase in the value of the property, but you will also have additional contributions in the form of rental income.
    • Ability to pay off SMSF faster: The majority of the money from rental payments goes towards paying off the mortgage on a typical investment property. Rental income and consistent contributions to a superannuation fund can both be used to make repayments on an SMSF loan, which means that the loan can be paid off much more quickly.
    • Paying less tax on your contributions: The typical rate of taxation applied to personal income is around 30%, while the SMSF tax rate is only 15%, which is a significantly smaller number. In addition to this, any interest that is paid on a loan taken out by your SMSF is eligible for a tax deduction for the SMSF.
    • Retirement revenue: Once the SMSF loan has been fully repaid, the continuous rental payments can be used as a dependable source of cash throughout retirement. This is possible once the SMSF debt has been fully repaid. The SMSF also has the option of selling the property and using the money from the sale to distribute retirement income to the beneficiaries.
    • Funding additional investment: The overall value of the SMSF can be increased by using a property investment in the fund to fund more investments in the future, which will also increase the value of the SMSF.

    Benefits of investing through your SMSF tax-wise

    The primary advantage of investing in real estate through your SMSF is the favourable tax treatment it provides. Your SMSF will be subject to a maximum tax rate of 15% on the revenue from the rental property. This rate falls to 0% if your SMSF is in the pension phase, which is the lowest possible rate.

    This can give significant tax savings in comparison to a property held personally, where the rental income is taxed at your marginal tax rate; this is especially true if your tax rate is as high as 46.5%. (including Medicare levy).

    Another benefit is that any capital gains gained on the sale of the investment property if your SMSF retains it for more than 12 months would only be taxed at a maximum rate of 10%, or again, 0% if the SMSF is in the pension phase.

    Get in touch with our office as soon as possible if you wish to exert more influence over your retirement savings and use your superannuation funds to make purchases of residential and commercial real estate.

    Purchasing real estate with your Self Managed Super Fund

    1. Guidelines for Residential Properties

    The following requirements need to be met by the property before it can be purchased with your SMSF:

    • Not be purchased from a member's family member, spouse, or other linked person
    • Not be occupied by any fund members or any linked parties to fund members at any time
    • Not be rented by a member of the fund or any parties associated to members of the fund
    • Pass the "sole purpose test," which requires that the fund's members' retirement benefits be its only focus
    • The objective of the sole purpose test is to guarantee that the SMSF is used for the sole purpose of delivering benefits to members upon their retirement or to their dependants in the event that the member passes away before they reach retirement age.

    2. Property Regulations: Governing Commercial Real Estate

    When it comes to investing in real estate, commercial property is typically considered to be the superior choice to residential property. However, it is essential to keep in mind that the same limitations, such as the sole use test, are imposed on residential and commercial property alike. This is an essential point to keep in mind.

    Small and medium-sized businesses are increasingly considering the possibility of purchasing commercial property through a self-managed superannuation fund (SMSF) and then leasing it back to themselves by paying rent to the SMSF.

    If you go through with this plan, it is imperative that each investment be handled on a purely business-oriented basis for management purposes. In addition to this, you are required to abide by the following conditions:

    • The lease conditions ought to be commercially competitive and consistent with the value of the market. This indicates that you are unable to lease the property for a sum that is far lower than what it is worth to you in order to save money.
    • You are obligated to have frequent valuations done on the property in order to ensure that the rent you are paying is equivalent to the property's value on the market.
    • You are responsible for making on-time and complete payments of the rent at all times. As is the case with all other rental agreements, you are not permitted to pay even a day or two late on the grounds that you have had a less than successful week.

    Best practises for using a Self-Managed Super Fund to purchase an investment property (SMSF)


    1. Maintain ATO compliance

    The ATO has established very stringent requirements that must be adhered to in order to utilise an SMSF for the purpose of purchasing an investment property.

    Because every trustee is accountable for ensuring that regulations are followed, every trustee needs to be aware of the things that can and cannot be done. In addition, the ATO may issue costly fines for noncompliance, which is another another reason why it is in your best interest to spend some time familiarising yourself with the relevant regulations.

    2. Check to see that the property is being acquired with the correct name

    The proper name must be used in order to purchase an investment property through a self-managed super fund (SMSF). Assuming that they have till settlement to get everything in order, it is not uncommon for people to sign a contract before they have established the SMSF and any other associated legal entities. This is because they are under the impression that they have enough time.

    On the other hand, if the property is not purchased in the correct name, you will be required to pay stamp duty a second time (once for the initial purchase and then again when you transfer it to the correct name).

    3. Recognise the constraints that apply to renovations

    When you use an SMSF to purchase an investment property, you gain the legal authority to perform basic repairs and upkeep on the property.

    If, on the other hand, you bought the property with the help of an LRBA, you won't be able to "make significant alterations" to it while the loan arrangement is still in effect because that would violate the terms of the agreement. Any significant remodelling would have to be postponed until the loan was fully repaid or it would have to be covered by a new LRBA.

    4. Obtain unbiased guidance from qualified professionals

    The acquisition of an investment property using a self-managed super fund is a substantial purchase that demands a large amount of forethought in addition to extensive research.

    You will need to evaluate the future return, what risks are involved, and what type of gain in property value you may anticipate before moving forwards with the project. It is in your best interest to consult knowledgeable individuals who are able to provide objective advice in order to assist you in making well-informed judgments.

    5. Services Relating to Financial Planning

    Those who want more control over the investments they make for their retirement may find that self-managing their superannuation fund is an excellent option. Please get in touch with us as soon as possible for more information on the steps involved in establishing and administering an SMSF.

    We provide lending solutions to SMSF property investors, and in addition to that, we also offer in-house services for financial planning and planning for retirement.

    We are able to walk you through every step of the process of setting up a self-managed super fund (SMSF), provide answers to any concerns you might have about SMSFs, and even assist you with the initial setup and ongoing management of your self-managed super fund.

    What is the general agreement now?

    • Investing in real estate through your self-managed superannuation fund (SMSF) can be a complicated procedure; however, if you currently have an SMSF, you are probably aware of the potential complications that might arise from such an elaborate financial structure.
    • Investing in property through an SMSF can be a suitable approach for certain people, whether the goal is to diversify their assets or to use the property for business.
    • When it comes to liquidity and cash flow, residential SMSF investments can often have more drawbacks than they have benefits in certain circumstances.
    • No matter whatever path you choose, maintaining compliance is the top priority, and this will require the assistance of a group of trained experts. Throughout the entirety of the purchase process, it is in your best interest to maintain frequent consultations with expert financial counsellors and accountants.

    One rule of thumb that has circulated in SMSF circles for years is that the bare minimum required to be able to cost-effectively run a fund is around $200,000.

    Qualifying as an SMSF

    Be a superannuation fund; Have fewer than five members; and. Have each member as either an individual trustee of the fund or the director of a corporate trustee (and vice versa). Somewhat surprisingly, only about 30 per cent of SMSFs have corporate trustees.

    A self-managed super fund (SMSF) is a private super fund that you manage yourself. SMSFs are different to industry and retail super funds. When you manage your own super, you put the money you would normally put in a retail or industry super fund into your own SMSF. You choose the investments and the insurance.

    Scroll to Top