Investing in property using an SMSF isn’t as simple as it seems

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September 20 2021
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There are plenty of good reasons to invest in property via an SMSF, but it pays to do your homework.

Self-managed super funds (SMSFs) got the green light for limited resource borrowing arrangements (LRBAs) back in 2007.

The years since have seen more and more Australians have looked to supercharge their superannuation through assets like property and shares.

Since you can direct how your super is invested with a self-managed super fund, LRBAs allow you to choose to take advantage of Australia’s property market now rather than later.

A senior financial planner at Creation Wealth, Andrew Zbik suggested that LRBAs within Australia’s superannuation system now account for 2.32 per cent of all loans.

If you’re looking to add your retirement fund into that statistic, he said that there are four key things you’ll need to keep in mind.

The first is that you’ll need to comply with a ton of regulations and rules around how SMSFs are structured. More than just the minimum $500,000 that ASIC requires to establish an SMSF, the ATO obliges SMSF trustees to keep asset diversification in mind.

Mr Zbik said that the days of starting an SMSF with a balance of $200,000 to buy an investment property as the sole asset of the fund are numbered.

“Such a move is no longer deemed to be in the best interest of the members of the fund, due to a lack of asset diversification and a lack of liquidity,” he explained.

“Most lenders are now requiring a 10 per cent liquidity buffer of cash and/or shares outside of the value of the property.”

Capitalising on the explosive trends in Australia’s property market might seem like an easy way to boost your super. However, Mr Zbik noted that it’s not going to be a gambit that works well for everyone, due to the typical length of Australia’s property cycle.

If you have less than 10 years between now and your retirement, this might not be the property play for you.

“Ideally, the intention should be to hold the property beyond this minimum time period of 10 years,” Mr Zbik explained.

If you’re anywhere near retirement, you’re not going to have the time needed for your SMSF to go through the full process of buying a property, paying off the debt, letting it appreciate and then flipping it into an asset class that provides a higher income yield.

“Thus, I believe property is a great asset to provide leverage and capital growth, but property is not necessarily the best income-producing asset to provide an income stream to fund an account-based pension,” Mr Zbik said.

Many Australians approach super with a set-and-forget mindset. Unfortunately, if you’re planning to invest in property via an SMSF, that approach isn’t as viable.

Mr Zbik said that the logistics associated with cash flow and loan repayments mean that property investing via SMSF is a more hands-on affair.

“Whenever you take on a loan, you need a plan to pay down this loan,” he said.

“Will your concessional contributions be enough to pay out the loan? Will you need to make extra contributions to your SMSF to have the property loan paid down before retirement? These questions need to be answered.”

If one of your SMSF members loses their job or your property loses its tenant, it can cause big problems for your property investing strategy.

In either case, Mr Zbik recommended your SMSF hold a cash buffer that amounts to six months of property expenses.

“A good diversification strategy would also include other liquid assets such as Australian shares, international shares and fixed-income securities,” he said.

That way, in the worst-case scenario, you have other assets available to liquidate and can avoid a “fire sale” of the property.

“With property, it is not possible to shave off a bedroom and sell it to provide cash for pensions,” Mr Zbik said.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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