How to buy property with your SMSF

How to buy property with your SMSF

One of the biggest advantages of having a self managed super fund (SMSF) is the ability to directly invest in real estate. While the ability to borrow in super to purchase property has only been around in the last few years, self managed funds have always had the ability to purchase property in super.

You can purchase both commercial and residential properties in super; you can take advantage of government sponsored property schemes such as the National Rental Affordability Scheme, and you can even invest in foreign real estate if you have addressed and accept the additional risks. However, the super fund cannot purchase a residential property that a member owns in their individual name. 

The advantages
  1. The tax on any capital gains for a SMSF in accumulation phase is 15% if sold within a year, and 10% if sold after 12 months. The proceeds are capital gains tax free if sold in pension phase. A 0% tax rate is hard to beat!
  2. Only 15% tax on earnings in accumulation, and 0% in pension phase
  3. Property provides diversification from traditional share investments
  4. Appealing for those who are more comfortable investing in property rather than shares.
The considerations
  1. You cannot live in the property, and neither can any friends or family. (If the property is a commercial property, you may be able to lease it.)
  2. Liquidity is significantly reduced. The fund will still need to be able to meet expenses like tax liabilities, strata and council rates, and this might be an issue if tenants are hard to come by. The lack of liquidity can also present cash flow issues when needing to make a minimum pension payment while in pension phase
  3. Unless you’re borrowing to purchase the property, you need a higher amount in your super fund to make this a viable investment, as real estate requires a higher level of investment compared to shares. Otherwise, you may not have diversified your investments sufficiently
  4. Property has a longer investment cycle – generally more suitable for those who are willing to be in the property market for at least 10 years. 
How borrowing works

As mentioned, the ability to borrow in super is a relatively new phenomenon. It continues to generate more interest, as there are more banks offering appropriate loans and the costs decline. If you are considering borrowing within super, you should be aware of the following issues:

  1. Make sure that the property purchased fits the investment strategy of your fund
  2. The paperwork and costs associated with setting up the required structure and the loan costs associated with borrowing can still present a barrier to some SMSF investors with smaller super balances
  3. Negative gearing isn’t as advantageous in super as it is outside super. Since the tax rate is only 15% in accumulation phase, the value of the deduction is significantly lower in super when compared to individual marginal tax rates
  4. You cannot use borrowed funds to improve the property, only to repair and maintain it
  5. Even if you have extra cash in your SMSF to improve the property, you cannot fundamentally change the nature or purpose of the property (there are limited exceptions given to off-the-plan properties).

Like borrowing to purchase property in your own name, borrowing in super is a great way of getting into the property market earlier if you don’t have quite enough in super to be able to purchase a property outright. Just remember to consider both the advantages and disadvantages of the investment before going into it.

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