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Why is buying property through an SMSF on the rise?

By zmtorrazo
April 18 2023
3 minute read
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Despite buying property through an SMSF growing in popularity among Australians, one expert warns this option requires careful consideration and planning.

Rebecca Jarrett-Dalton, a highly experienced mortgage broker with nearly two decades of industry experience, runs her own brokerage business in Sydney called Two Red Shoes. Ms Jarrett-Dalton noted the recent trend of increased enquiries related to property purchases through SMSFs. Her claims were ratified by the ATO’s SMSF statistics for September 2022, which revealed there are 603,449 SMSFs in Australia managing $865.2 billion in assets.

Interestingly, the data showed the top asset types held by SMSFs (by value) are listed shares (28 per cent of total estimated SMSF assets) and cash and term deposits (16 per cent).


Why is there an increased interest among SMSFs in investing in property? 

While acknowledging that there may not be a singular reason behind the recent surge in Australians using SMSFs to purchase property, Ms Jarrett-Dalton has identified a number of contributing factors including the recent underperformance in the stock market, limitations on borrowing capacity outside of super, perceived value and tax benefits, a growing confidence in property, and the need for a substantial deposit to invest in personal names.

As for what types of property SMSFs are taking an active interest in, Ms Jarrett-Dalton said they are drawn to “commercial units like offices or small warehouses, standard residential properties and occasionally land”. 

She highlighted that using an SMSF to purchase property instead of buying property in your personal name has its advantages. 

“[Purchasing] property in your SMSF has capital gains tax advantages at retirement over purchasing in your personal name. It also makes use of the money you have in the fund in an asset that Aussies understand and believe in more than shares.” 

Ms Jarrett-Dalton further explained that in addition to property investment having the potential for capital growth, it could also provide a return to the SMSF while the investment is in place.

Lastly, she noted that using an SMSF to purchase property is separate from your personal investments, which means that it doesn’t impact your borrowing capacity for personal investments as much as it might if you purchased the property in your personal name.

But despite the numerous advantages that purchasing real estate through an SMSF can offer, it’s important to be aware of the potential risks and drawbacks associated with this type of investment. According to the expert, there are several factors to consider.

“Like any property purchase, there are substantial costs to purchase and/or sell a property which means that your strategy isn’t as ‘liquid’ or moveable as a share portfolio.”

“Furthermore, property is subject to rise and fall in values as well as potential trouble with finding or keeping a good tenant. There are additional compliance obligations in managing an SMSF such as auditing costs and future potential changes in legislation can cause concern,” she added.

Ms Jarrett-Dalton emphasised the key legal and regulatory considerations that individuals must keep in mind when using an SMSF to invest in property.

One crucial aspect she noted must be considered is that the cost of administering an SMSF is higher than that of an industry fund, so individuals must weigh their potential returns against these costs and maintain a buffer in their account to cover any unforeseen expenses.

Additionally, she highlighted the importance of ensuring that an SMSF’s deed or rules permit property investment, including borrowing to invest, if that’s part of an individual’s strategy. 

Another important consideration Ms Jarrett-Dalton called attention to is the benefit of asset diversification. “For some people, [property] will become almost their only asset in the fund, which doesn’t provide the ideal diversity of investment.” 

With the Superannuation Act not allowing for “improvement” of properties – only repairs and maintenance, which precludes construction of a new dwelling – she warns that this catches out some of our potential investors holding vacant land. 

Due to the associated costs, she also explained there is generally a minimum fund value that is considered appropriate for investing in property, which currently sits at around $250,000 but varies with the value of properties.

Given the complicated nature of buying property through this option, Ms Jarrett-Dalton urged individuals to carefully evaluate whether investing in property through an SMSF aligns with their retirement goals and financial situation. 

“This is absolutely the time for good quality advice and should involve your financial planner, accountant and potentially an SMSF expert to assist with establishing the fund.”


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