We look at the benefits and risks below.
You will need to adhere to the SMSF rules.
Before considering a property investment, be aware that you will have to comply with the rules. The property will need to pass the ‘sole purpose’ test- it will need to solely be providing retirement benefits to members. You can’t buy it from a relation of any of the members, it cannot be lived in by any of the members or their relatives, and it cannot be rented by a member or their family. The only exception comes occasionally when it is a business premises for the family. You will only be able to do this if you will be paying rent at the market rate.
Be aware of the fees you and the SMSF will pay investing in property.
Self managed superannuation fund property sales attract a host of charges. These can add up and defeat the purpose of maintaining the SMSF’s balance. Be certain that you understand these fees properly before proceeding with a purchase. There will be stamp duty, bank fees, property management fees, legal fees and the upfront fees. There is one fee you should never scrimp on, however, and that’s advice fees. You will need the opinion of a third party with no vested interest in either the sale of the property or the self managed superannuation fund itself to guide you as to whether the purchase is right for your super or not. Make use of reputable people like smsfselfmanagedsuperfund.com.au to help guide you as to your options. Do watch out for fees by advisory groups. Is the one place where it’s usually better to avoid a recommendation! The advice must be independent, and anyone advising on a SMSF transaction must hold an Australian Financial Services License.
Avoid National Rental Affordability Scheme houses.
Treat anyone who suggests investing in this particular class of property with some suspicion. The AISC has advised that these offers are often misleading. The amount of free tax grant you receive will often not fall into line with the promises made.
Borrowing conditions for an SMSF
Gearing the SMSF or borrowing in general, has to be done carefully. Use a ‘limited recourse borrowing arrangement’ for safety. Although this can only be used to purchase a single asset, it will help limit liability in the case of a default and preserve the rest of the fund. Remember that property in your super will carry higher costs, limit your cash flow as loan repayments must take place through the super, can be very hard to unwind or cancel down the line if there is any hiccough with the documentation or contract, and tax losses from the property will not be allowed as an offset to your external taxable income. You will also be forbidden from borrowing to improve on the property itself- only for maintenance.
While property can be a valuable part of an SMSF, you need to handle the transaction with care and get independent advice to assist you in making the decision.