A Comprehensive Step by Step Guide to Purchasing Property with Your SMSF in Australia

If you’re considering property investment as part of your retirement strategy, you may already know that your Self-Managed Super Fund (SMSF) can be a powerful vehicle for building wealth. However, buying property within an SMSF comes with strict rules, requirements, and processes to ensure compliance with regulations. In this guide, we’ll provide a step-by-step breakdown of purchasing property with your SMSF, covering everything from setting up your SMSF to maintaining compliance after purchase.

Step by Step Guide to Purchasing an Investment Property using SMSF Step 1 – Speak to a Financial Planner

Contrary to popular belief, the first step to purchase a property in your SMSF is not to establish your SMSF, rather, it’s to have a conversation with a qualified financial adviser or planner who specialises in SMSF investment and compliance.

It’s important to understand the pros and cons and suitability of your investment decisions to using a SMSF to purchase a property.  It’s also important to understand all the rules and regulations, especially your individual responsibilities in having a self managed super fund.

A financial planner will review whether investing in property using your super is a suitable for your situation and advise what impact this may have on your existing insurances that you already have set up in your superfund.

Additionally, they will go through with you on how buying an investment property using your SMSF fits within your entire retirement and wealth creation strategy.

Pro tip: Financial planners will often advise you to not rollover all of your super to your SMSF.  This is because, it’s important to leave enough money in your current superannuation fund to pay for your existing insurances.  If these insurances are cancelled, there is a real risk that you may not qualify for the same level of insurance again which can be a risk should you need to claim in the future.

Step 2 – Speak to a mortgage broker

Once you have confirmed that buying a property in an SMSF is a suitable investment strategy for your retirement, before you start establishing the SMSF, you should always speak to a mortgage broker who specialises in SMSF investment loans.

This is because you need to understand the key numbers to your purchasing scenario so you can determine whether it’s realistic and consistent with your goals and objectives.  These numbers included, but not limited to:

  • How much can you borrow
  • How much deposit you need to have or contribute
  • What will be the interest rate and repayment of the SMSF investment loan
  • What is the purchase budget based on the above calculations that you can consider
  • Do these numbers stack up against your projected cashflow and capital gains of the property

Once you have this information, you can either decide to establish your SMSF and proceed with obtaining preapproval or you may revisit your strategy to buying property through an SMSF with your financial planner.

The purpose of having this conversation with your mortgage broker is to avoid you spending money on establishing the SMSF only to find out that you don’t have enough borrowing capacity or deposit in your SMSF to purchase a meaningful or suitable property.

A SMSF specialist mortgage broker can provide you with all the above numbers without needing to submit an application for preapproval.  They will only require your supporting documents to ensure the calculations are accurate.  See this article for a list of supporting documents required.

Pro Tip: Some lenders allow you to submit an application before you establish your SMSF however more and more lenders are requiring that a SMSF be established first before they can accept an application for preapproval.

Step 3 – Establish Your SMSF (If Not Already Set Up)

Now that you’ve confirmed that buying a property through SMSF is definitely the way to go, here’s what’s involved to establish your SMSF:

A SMSF specialist financial planner or SMSF specialist accountant are able to assist you with the below setup process.

  • Choosing Trustees: Decide whether the SMSF will have individual trustees or be managed through a corporate trustee structure. This choice impacts your SMSF’s setup, so consult with a specialist if you’re unsure which option suits you best.  See here to understand the different types of trustees and their pros and cons.
  • Creating the Trust: The SMSF must be established as a trust, with a trust deed that outlines the fund’s purpose and operating rules. The trust deed should include specifics on how investments will be managed and the roles of trustees.
  • Registering with the ATO: Register your SMSF with the Australian Taxation Office (ATO) to obtain an Australian Business Number (ABN) and Tax File Number (TFN). Registration ensures your fund qualifies as a regulated super fund, making it eligible for tax concessions.
  • Setting Up an SMSF Bank Account: Open a dedicated SMSF bank account, which will hold contributions and be used for all SMSF transactions, including any property investments.

Pro Tip: There are many online only SMSF set up providers which charge a minimal fee for the service however, they are usually very light on advice which is why this is a low-cost option.  It is highly recommended to obtain professional and expert advice and assistance with a SMSF to avoid any financial penalties or breaches of regulation in the future which can possibly cost you thousands of dollars, offsetting any money you saved by using the cheaper online options.

Step 4 – Formulate a Clear Investment Strategy for Your SMSF

Every SMSF requires a documented investment strategy that guides its financial decisions. Your SMSF investment strategy should take into account the following:

  • Risk and Return: Consider the level of risk associated with the SMSF’s investments, including property, and whether it aligns with members’ risk tolerance.
  • Diversification: Diversifying investments can protect the SMSF from fluctuations in any single asset type.
  • Liquidity: Ensure the SMSF has enough liquidity to cover its liabilities, including potential loan repayments.
  • Sole Purpose: The strategy must demonstrate that the SMSF is focused on providing retirement benefits, aligning with ATO requirements.

If you’ve engaged a SMSF specialist financial planner, this will be part of their strategy and advice.

Step 5 – Determine Borrowing Needs and Eligibility for SMSF Loans

SMSFs are allowed to borrow money under a Limited Recourse Borrowing Arrangement (LRBA), provided they meet specific criteria.

  • Assess Cash Flow: Before seeking finance, review your SMSF’s cash flow to determine whether the fund can comfortably manage a property purchase, including potential loan repayments.
  • Consider the LRBA Option: LRBAs allow SMSFs to borrow funds to acquire property, where the lender’s recourse is limited to the property purchased. This limited recourse feature protects the SMSF’s other assets.
  • Consult with a Mortgage Broker: Partnering with a mortgage broker who specialises in SMSF lending can help you navigate available loan options and choose a loan structure that meets ATO requirements.

Step 6 – Set Up a Bare Trust Structure

When borrowing within an SMSF, the property must be held in a separate trust structure known as a “bare trust” or “custodian trust.” Here’s why this is essential:

  • Limited Recourse Setup: A bare trust holds the legal title to the property for the SMSF’s benefit. The SMSF has a beneficial interest in the property, but until the loan is repaid, the legal title remains with the bare trustee.
  • Transfer of Ownership: Once the loan is paid off, the property title can be transferred from the bare trust to the SMSF. This arrangement keeps the SMSF’s other assets protected if the loan defaults.

Step 7 – Conduct Due Diligence on Property Selection

Choosing the right property is crucial for achieving a positive return on your SMSF investment. Ensure the property aligns with the SMSF’s investment strategy:

  • Select an Investment Property Type: SMSFs can invest in residential, commercial, or rural property, provided the property is solely for investment purposes. You cannot use or rent a residential property within your SMSF to a related party. The only exception to this rule is when you are running a business and use your SMSF to purchase a business premises and your business becomes the tenant.  However, in this case, the rent being charged must be market rent.
  • Research the Market: Investigate property location, rental demand, growth potential, and economic conditions. Choosing a property with strong rental returns and capital growth potential can enhance your SMSF’s long-term benefits.
  • Engage Professional Support: Work with property valuers, building inspectors, and legal experts to conduct a thorough due diligence process and verify the property’s market value.

Pro Tip: When buying an investment property purchased through an SMSF, it is worth considering using the services of a qualified buyers agent specialising in investment properties. This is because, the risk of choosing the wrong property is higher and can create more significant negative impact to your overall financial position due to the restrictive nature of using a SMSF to purchase.

Step 8 – Make an Offer and Secure Loan Pre-Approval

Once you’ve found the right property, the next steps are securing loan pre-approval and making an offer.

  • Loan Pre-Approval: Your mortgage broker can help obtain conditional loan pre-approval. Pre-approval helps you understand how much your SMSF can borrow, enabling you to negotiate with confidence.
  • Signing the Purchase Contract: Either the SMSF trustee or the bare trustee can sign the purchase contract, depending on your setup. Ensure that any purchase contract includes clauses allowing assignment to the SMSF after the loan is repaid.

Pro Tip: Ensure your solicitor or conveyancer is knowledgeable in helping their clients purchase property through a self-managed super fund so they can advise you correctly on exchanging contracts correctly. There can be costly mistakes if the incorrect entity is on the contract of sale which can lead to stamp duty being charged twice.

Step 9 – Finalise the SMSF Loan and Trust Arrangements

As you approach settlement, confirm that all financial and legal arrangements are in place.

  • Review Loan Terms: Many lenders require the loan documents to be reviewed by a solicitor before you can accept them so make sure you consider this as part of the process.
  • Set Up Final Trust Documents: Your solicitor should ensure the bare trust is correctly documented, and all loan and trustee agreements are in place before settlement.
  • Complete Final Loan Approval: Accept the lender’s loan documents and provide all outstanding documents as part of the settlement condition to ensure there are no delays to your settlement process.  Your mortgage broker and solicitor should be guiding you through this step.

Step 10 – Complete Settlement and Transfer Title

Settlement is the stage where the SMSF, through the bare trust, officially takes ownership of the property.

  • Settlement Process: During settlement, funds from the SMSF account and loan provider are used to complete the purchase. All fees, such as legal and lender costs, are finalised at this stage.  Your solicitor will provide you with a settlement statement which clearly details the total amount you need to pay the vendor at settlement.  This total amount will be a combination of your additional deposit contributions and the SMSF loan.
  • Title Transfer: The property title is registered in the name of the bare trust, with the SMSF as the beneficial owner. This limited recourse setup remains until the loan is fully repaid.

Step 11 – Managing the Property within the SMSF

Once the property is acquired, it must be managed in compliance with SMSF regulations.

  • Rental Income and Expenses: All rental income generated by the property must be deposited into the SMSF’s bank account, and all related expenses (e.g., maintenance, loan repayments, property management fees) must also be paid from the SMSF.
  • Ongoing Compliance: Ensure all transactions related to the property are conducted at arm’s length, especially if renting to a business owned by a fund member (allowed only for commercial properties).
  • Review Investment Performance: Regularly assess whether the property continues to align with your SMSF’s investment strategy.

Pro tip: It is highly recommended that you engage a SMSF specialist accountant to manage an SMSF for property investment combined with engaging a property management company instead of doing things yourself.

Step 12 – Review Compliance and Keep Records Up to Date

Maintaining up-to-date records and reviewing compliance is critical to avoid penalties.

  • Record-Keeping and Audits: The ATO requires annual SMSF audits, so keeping accurate records of all SMSF transactions is essential for compliance.
  • Annual Review of Investment Strategy: Regularly review the SMSF investment strategy to ensure it still suits members’ retirement goals and accounts for market changes.
  • ATO Tax Reporting: The SMSF must file annual tax returns and report on all activities to the ATO, maintaining strict compliance with superannuation laws.

Conclusion – Is Investing in Property with an SMSF Right for You?

While investing in property through an SMSF can offer substantial benefits, such as tax advantages and control over retirement assets, it also involves significant complexity and regulatory requirements. Before proceeding, it’s wise to seek expert advice from SMSF specialists, including financial planners, mortgage brokers, accountants, and legal professionals, to ensure that your property investment aligns with your retirement goals.

Ready to Take the Next Step? Contact Us Today!

If you’re considering purchasing property through your SMSF, our team of expert mortgage brokers can guide you every step of the way. With years of experience assisting SMSF property investors, we can help you navigate the borrowing process, find suitable lenders, and structure your loan for compliance and success.

Get in touch with us today to start your SMSF property investment journey. Let us help you build the future you deserve!