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What should you consider when Investing Properties with SMSF?

Updated: Aug 10, 2023

Investing in properties through a Self-Managed Superannuation Fund (SMSF) can be a complex but potentially rewarding endeavor. Here are some important considerations to keep in mind when investing in properties with an SMSF:

  1. 1. Sole Purpose Test: The primary purpose of an SMSF is to provide retirement benefits to its members. Any investment, including property, must be made with the sole purpose of benefiting the fund's members in their retirement. This means that you cannot use the property for personal purposes or provide benefits to related parties outside the scope of the fund's purpose.

  2. Legal and Regulatory Compliance: SMSFs are subject to strict legal and regulatory requirements. Ensure that your property investment complies with all relevant laws and regulations, including restrictions on certain types of property (such as residential properties acquired from related parties) and borrowing limits for property investments.

  3. Investment Strategy: Develop a well-defined investment strategy that aligns with the fund's objectives and risk tolerance. Consider factors such as rental income, potential capital growth, and the property's contribution to the fund's overall diversification.

  4. Property Selection: Choose properties that are likely to generate rental income and have potential for capital appreciation. These days, a property with both yield and growth from Day One is very rare, so, you will usually need to choose one. Research the location, rental demand, vacancy rates, and property market trends before making a decision.

  5. Borrowing Considerations: SMSFs can borrow money to purchase property through limited recourse borrowing arrangements (LRBAs). Understand the rules and restrictions associated with borrowing, including repayment terms, interest rates, and potential impact on cash flow. There are also a lot less lenders who are willing to lend to a SMSF, as there is almost zero chance they can repossess the property if you default on the loan. This reduced competition, plus the higher risk (to the lenders), means the available lenders tend to charge a higher interest rates, plus reduce the loan to value ratio (LVR).

  6. Investment Structure: Property investments can be held directly by the SMSF or through a separate entity known as a special purpose vehicle (SPV). Consult with a experienced and qualified professionals / accountant to determine the most suitable structure for your specific circumstances.

  7. Financing and Cash Flow: Assess the fund's ability to meet mortgage repayments and other property-related expenses. Adequate cash flow is essential to avoid financial strain on the SMSF.

  8. Property Management: Property management is crucial for rental properties. Decide whether the SMSF will manage the property itself or engage a property management company. Consider the associated costs and responsibilities. It is always attractive to manage the property rental yourself, to save costs, but with the ever changing rental property rules and SMSF requirements, you need to be well-versed with the responsibilities and regulations around both.

  9. Property Expenses: Factor in ongoing expenses such as property maintenance, insurance, council rates, and property management fees when evaluating the potential return on investment.

  10. Valuation: Property held by an SMSF must be valued at market value. Regular valuations are necessary to ensure accurate reporting and compliance. Thus you need to factor the effort and cost involved in organising the valuations.

  11. Diversification: While property can be a valuable addition to an investment portfolio, diversification is important to manage risk. Avoid over-concentration in one asset class or location.

  12. Exit Strategy: Have a clear exit strategy in place for the property investment. Consider how and when the property will be sold, especially as you approach retirement and need to access the fund's benefits. Unlike traditional investment funds, selling your property can take between 2 to 6 months or more.

  13. Professional Advice: Seek advice from professionals experienced in SMSFs, property investment, accounting, and legal matters. This can help ensure compliance, effective decision-making, and the avoidance of costly mistakes.

  14. Costs and Fees: Property investments can incur various costs, including property purchase costs, property management fees, legal fees, and SMSF operational costs. Factor these costs into your investment calculations.

  15. Long-Term Horizon: Property investments are typically best suited for the long term. Consider whether the investment aligns with the fund's long-term retirement objectives.

Remember that property investment within an SMSF is a complex process, and the rules and regulations governing SMSFs can change over time. The Australian Tax Office (ATO) is very strict with SMSF compliance, and the investor should be ready for any audits. It's crucial to stay informed, seek professional advice, and regularly review your investment strategy to ensure that it remains aligned with your retirement goals and complies with all legal requirements.

Not Financial Advice Disclaimer

General Advice Warning: This general information is meant for general educational purposes only. It is not professional financial advice from Concierge Buyers Advocates and does not take into account your personal needs and situation. You should not take this as your personalised and tailored financial advice. Concierge Buyers Advocates not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article. Always seek appropriate financial advice. We have a panel of advisor partners who will tailor their advice based on your personal situations.

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