An Expert’s Guide on Choosing the Right Property for Your SMSF Investment

An SMSF investment marks an exciting step towards having complete control of your retirement savings. Suppose you’re one of those planning to utilise your super to jump into the property market soon. In that case, it’s important first to understand what a successful SMSF property investment means in Australia. That’s where the role of an expert begins.

As Melbourne’s leading property investment expert, we’ve been helping property investors in Australia navigate this space. We believe that the SMSF property investment journey starts even before you start looking for a property ‘for sale’. To choose the right property for your SMSF investment is a crucial step in this journey. We take it as a strategic exercise, because we know that it’s not just a lucky guess.

Step 1

Lay a Strong Foundation with a Solid Investment Strategy

Even before you start browsing properties for sale on the Australian real estate market, here’s a quick, practical tip for SMSF property investment. Always consider having a robust investment strategy, note it down meticulously, for it will help you ensure the property you choose aligns with your strategy. Your SMSF must have a formal document that clearly outlines your investment goals, your diversification plan(s), and risk tolerance.

Are you aware of your fund’s risk profile?

Whether you’re chasing capital growth, fine with a higher risk, or a conservative investor simply looking forward to having a stable income, asking this question of yourself is critically important.

Are you sure of having sufficient cash flow?

The Australian Taxation Office (ATO) demands that your fund should be liquid enough to cover all your ongoing expenses, like maintenance, rent, bills, and more, besides loan repayments. The whole point is to have member benefits without having to sell the property.

Does the property meet your goal?

Remember the Sole Purpose Test. This investment should be exclusively for providing you with retirement benefits.

Step 2

Residential or Commercial – What’s Your Choice?

This is the point where the rubber meets the road. Once you understand the advantages and disadvantages of both SMSF residential property investment and SMSF commercial property investment, it becomes easier to choose the best option to suit your financial situation and strategy.

Residential Property – Pros and Cons

• Most people have at least some knowledge about residential property deals, the market situation, tenant expectations, rental yields, and more.
• When it comes to residential property, the buyer pool is always large, and the market is always wider, which naturally helps you at the time of selling the property in the market.
• Location is a vital parameter, because a residential property based in a prime location is the key to consistent, long-term capital growth.

However, compared to commercial properties, residential properties generally have a lower rental yield. Moreover, the rules are strict. Neither you/your family members can live in that property, even for a brief period or just for a holiday, nor can you rent it to any related party.

Commercial Property – Pros and Cons

• Unlike residential properties, commercial properties tend to offer you a higher rental yield, strengthening the cash flow of your SMSF fund.
• Moreover, the lease tenure typically lasts 3 to 5 years or even longer, which ensures your income is more predictable, reliable, and stable.
• Your SMSF can purchase the commercial premises you operate from, and your business can directly pay rent to your super fund. It prompts a powerful business opportunity.

However, commercial properties are often more vulnerable to market conditions. Their rental income and value are especially more sensitive to economic downturns. Moreover, the commercial property market is smaller, which makes a quick sale relatively difficult.

Step 3

Know the Key Parameters for SMSF Property Investment

Once you decide what type of property to invest in, the next thing you should do is to note the key attributes.

• Location is the prime factor to consider. You should look for localities with infrastructural growth, strong population growth, and low vacancy rates. The choice of location directly influences the rental income and future capital growth.
• Cash flow is something to be on your mind always. Remember, a positively geared property where the rental income covers your loan repayments + all other expenses is a substantial asset for an SMSF. For that, your focus should be on net rental yield.
• The next parameter that matters is the age & condition of the property. A newer property simply means low maintenance costs.

When you’re investing in a property, we strongly recommend you do your due diligence with an independent building inspection for pests and any hidden issues. Skipping this may cost you heavily in the form of drained liquidity and a failed strategy in the long run.

Step 4

Are You Partnering with the Right Experts?

The SMSF property landscape is complex, and navigating the complexities is a team sport. When it comes to choosing an SMSF property mortgage broker in Melbourne, choose wisely, because the broker is going to be an essential member of this team. Thousands of property enthusiasts in Melbourne choose VOXFIN as their specialist broker. Why?

We have direct access to lenders

We have nurtured relationships with a limited number of lenders, specialised in SMSF loans. We’re well aware of their criteria and process, which saves a lot of effort and time for us.

We have compliance expertise

The loan structure (a Limited Recourse Borrowing Arrangement) is complex. We make sure that your loan is set up in compliance with ATO rules and all your super assets are protected.

We provide expert strategic guidance at each step

We guide you on the assessment of your fund’s borrowing capacity and find you a perfect loan.

FAQs

Can I buy any type of property in Australia with my SMSF?

No, with your SMSF, you can only invest in residential or commercial property, provided it meets the Sole Purpose Test. The sole purpose of buying a property should be retirement benefits.

Can I or my family members live in the SMSF property? Can I lease it to anybody related?

No, for a residential SMSF property, neither you nor your family members can live in or rent out. However, if it’s a commercial property, you can lease it to your own business – the regulatory terms are strict.

How much deposit does my SMSF need to buy property?

Typically, lenders ask for around 30–40% deposit of the property’s total value. The exact figure, however, depends on specific lender requirements, your contributions, and SMSF balance.

What is a Limited Recourse Borrowing Arrangement (LRBA)?

It’s a structure that allows an SMSF to buy or borrow a property, which ensures that if the loan defaults in future, it won’t risk your entire fund – only the specific asset will be at risk.

Can I use my borrowed SMSF funds for property renovations?

No, you can use your borrowed SMSF funds only to acquire a single acquirable asset. However, you may use the SMSF cash reserves for maintenance and repairs.

Are there any specific tax benefits of owning an SMSF property in Australia?

Yes, the rental income is taxed at a concessional rate of 15%, and capital gains tax can drop to 10% if the property is held for more than 12 months. Once you’re in the pension phase, your earnings may even become tax-free. Call us to know more.

Disclaimer: above blog is a general knowledge sharing purpose only. It can’t be considered as personal advice. Please consult a financial adviser for personalized advice.