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Pros and Cons of Using SMSF to Investment Property

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A self-managed superannuation fund (SMSF) is a great way to have control over your retirement savings. With an SMSF, you’ll have the flexibility to invest your superannuation in projects that you think are lucrative and worthwhile. 

One of the most popular SMSF investment strategies is purchasing real estate. Buying investment properties through SMSF loans can offer great advantages, but the process can be complicated. 

Make the most out of your SMSF and create the best SMSF strategy by being well-informed. Here are important things you should know about SMSF property investment: 

Using an SMSF to invest in property 

With an SMSF, you can purchase a property without putting money aside or spending out of your own accounts. Take note, when using your SMSF to purchase property, you must follow certain rules and guidelines made by the Australian Tax Office (ATO). The property you purchase must: 

  • Meet the ‘sole purpose’ test (property must only provide retirement benefits to fund members) 
  • Not have been acquired from a related party of a fund member 
  • Not have any fund member or related parties reside on the property 
  • Not be leased to a fund member or related parties 

Commercial properties purchased through an SMSF can be leased to fund members for their business as long as they follow ATO rules. Be aware of these rules before purchasing an investment property with an SMSF loan.

Pros of an SMSF property investment 

Here are some key advantages of using an SMSF to purchase an investment property: 

Potential for property appreciation 

Investing in property may provide high returns with minimal risk. Real estate may offer increasing capital growth and rental income. It’s incredibly advantageous especially since you won’t be able to benefit from your investment until you’ve retired. 

Take out a loan with your SMSF

A lot of people aren’t aware that they can use an SMSF loan to buy their investment properties. This means fund members can have a wider selection of property because their budget isn’t as restricted. With an SMSF loan, fund members aren’t limited to the funds they have right now and can build a better investment strategy. 

If you’re going to take out an SMSF loan, your superannuation contributions will contribute to paying for that loan. You’re using a portion of your pre-taxed salary to pay for the SMSF loan which is also a great plus. 

Enjoy tax benefits for SMSF 

Properties bought through an SMSF loan can enjoy great tax benefits such as: 

  • Exempt from capital gains tax once the fund member/s retire 
  • Lower tax rate for rental income after expenses 
  • Tax deductions for loan repayments 
  • Investment-related insurance may be tax deductible 
  • Property depreciation may be tax deductible 
  • Claim tax deductions on the purchase price of the property and other costs related to managing the property 

As you can see, there’s no shortage of tax incentives when you use your SMSF to buy property. These tax advantages are one of the top reasons why a lot of people want to use their SMSF for real estate. Tax arrangements with SMSFs can be complex, and you should always get expert advice. 

Secure a residence for your retirement 

Earn money from your SMSF property investment and have a home to call yours once it’s time to retire. You can invest in a residential property and rent it out in the meantime. When it’s time to retire, you can buy the property from your superfund and make it your retirement residence.  

Diversify your investment portfolio 

You can use your SMSF to invest in different types of properties from commercial to residential. This allows you to branch out more and maximise your SMSF while diversifying your asset portfolio. Think about your goals and figure out what best suits your needs when using your SMSF for property investment. 

Lease the property out to your business 

This is a great boon for business owners. If you purchase a commercial property through an SMSF loan, you can rent it out to your business. The market-rate rental payment to your SMSF can be deducted from your company’s gross revenue. No more landlords or worrying about rent.

Cons of an SMSF property investment 

Like with any type of investment, there are some drawbacks to SMSF property investments you need to be aware of.  

Limitations on how to use the property 

Using your SMSF to purchase your investment property means abiding by strict rules set by the ATO. This includes restrictions on what type of property you can buy, and what the property is used for.

Selling is more difficult

Buying a property through an SMSF means it isn’t directly owned by you. Selling that asset will be more complicated, may take longer, and could cost you more. The price of your property may also depreciate depending on market factors. 

Property costs and additional fees 

Investing in property through an SMSF can be expensive with costs such as stamp duty, operational expenses, legal fees, and the like. Your superannuation fund needs to have a significant amount or it may not be feasible to purchase a property through your SMSF. See what type of SMSF loans are available to you and best fit your financial situation. 

Additional lender requirements for SMSF loans 

Lenders may require a higher initial deposit and personal guarantees if you take out an SMSF loan. Additional documents may also be required to ensure that you’ll make your loan repayments through your SMSF. 

What should you consider when using SMSF to invest in property? 

An SMSF property investment may sound exciting and profitable—and for some it is—but you need to make sure you’re making a knowledgeable and strategic decision. Your superannuation fund is nothing to play around with after all. Before you start investing, here are some essential tips: 

Ask an SMSF professional for help 

As you may have noticed, SMSFs can be tricky to navigate with so many rules and regulations to follow. If you want to handle your SMSF property investment with ease and efficiency, getting an SMSF specialist or a financial advisor is a good idea.  In fact, many lenders even require borrowers to seek out independent legal and/or financial advice to complete the loan application.

With the help of a professional, you’ll have someone guiding you through the process. You’ll know all the risks and rewards of your potential investment and how to best achieve your retirement goals. 

Consider your repayment capacity 

Look at the cash flow and repayment capacity of your SMSF. This is an important step to ensure you’re able to pay for the investment property you want to buy. Consider expenses like loan repayments, ongoing costs, and the like to make sure you’re making a sound investment.  

Find the perfect SMSF loan 

The SMSF loan you choose can make or break your property investment. Finding the right one is crucial for a successful SMSF property investment. The ideal SMSF loan has low rates and minimal to no ongoing fees so you can maximise your superannuation fund.

Let loans.com.au help you secure the best SMSF loan

At loans.com.au, we help investors get low-rate SMSF loans that fit their investment needs. We offer some of the best rates in the market—plus zero application, settlement, and ongoing fees!   

Speak with one of our friendly lending specialists today so you can know more about our SMSF loan. Book an appointment or call now!

About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

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