Investing in real estate through a self-managed super fund (SMSF) can turbocharge your wealth creation for retirement. But there are specific rules and steps for doing it right. This guide will walk you through everything you need to know about purchasing property with SMSF.

 

SMSF Property Investment Rules

There are a few key regulations governing SMSF property investments:

  • The property must have an identifiable investment purpose and provide benefits back to the fund. Buying a personal residence is prohibited.
  • All property purchases must be made and held “at arm’s length” to avoid conflicts of interest. Related-party rentals are allowed if at market rates.
  • SMSFs are subject to borrowing restrictions – the property purchase can only be financed up to a maximum loan-to-value ratio (LVR) of 70%.
  • If purchasing business real estate (like an office building), leasing space to related parties is capped at 5% of total space.
  • SMSF trustees must consider diversification and risk factors when making property investments.

 

SMSF Property Loan Options

Qualifying for a loan through SMSF is more complicated than personal finance. Here are the main SMSF loan types:

  • Limited Recourse Borrowing Arrangement (LRBA) – This allows SMSFs to use the property as loan collateral, with the loan held in a bare trust outside the fund.
  • Related Party Loan – The SMSF can borrow directly from a related party like a member or their associate, subject to strict rules.
  • Arm’s Length Loan – Commercial finance can be obtained from an unrelated third-party lender like a bank.

 

Saving a Deposit Through SMSF

A 20-30% deposit is recommended to access an SMSF property loan. Building this can be done by:

  • Maximizing super guarantee contributions from your employer
  • Making extra pre-tax or post-tax voluntary contributions
  • Directing investment returns into cash reserves
  • Selling down existing SMSF assets
  • Contributing funds from outside super

 

Where to Buy an SMSF Investment Property

Some key factors for selecting an SMSF property location:

  • Strong long-term capital growth prospects
  • Healthy rental yields to fund loan repayments
  • Diversification from existing residential and commercial rents
  • Proximity to transport links, amenities and services
  • Not too remote, still within a manageable distance

 

SMSF Property Due Diligence

Rigorously researching any potential purchase is crucial:

  • Ensure valuation stacks up and expected yields are realistic
  • Inspect the property and have professionals evaluate the condition
  • Check zoning regulations and potential development restrictions
  • Assess area vacancy rates, tenant demand and future supply pipelines
  • Research market historical performance and growth projections

 

By following the rules and doing thorough due diligence, purchasing property via SMSF can significantly boost your retirement funds. But always seek licensed financial advice tailored to your situation before proceeding.