Buying an investment property with SMSFBuying a SMSF property is not a short-term investment strategy. It is designed to fund your retirement and so needs careful planning to ensure that it is meeting this goal. To achieve this, you need to consider a range of factors before you commit your SMSF to investing in property.
SMSF residential property investment
It is possible to use a SMSF to purchase residential property, although there are a number of conditions attached. Investing in houses in this way is not the same as other forms of property investment, and so it might not be appropriate for you.
- A SMSF can be used to purchase established properties, including apartments, units, houses, single contract house-and-land packages, dual key properties.
- You can’t live in your SMSF property or rent it to a member of the fund or associated party while your trust owns it.
- You can live in your SMSF property after you retire, provided the ownership is transferred to you.
- Generally, a SMSF can’t be used to develop property.
When you are buying residential property with a SMSF, the location is crucial to helping you achieve long-term growth. It is generally the case that capital cities and larger regional centres are the safest bet in terms of rising house prices over time, as other sorts of locations tend to be more speculative. Therefore, buying in areas with a track record of growth is always advisable.
It is a generally accepted formula that the rental yield from a residential SMSF property investment needs to be in the region of 6% or more. This therefore should influence your choice of location, as buying in an area with low demand and high vacancy rates means you will be less likely to achieve this.
Maintenance and upkeep
It is a well established principle that one of the key elements of successful property investment is the length of time you hold a property, and this is especially true in the case of self managed super fund property investment. As you will be required to meet the costs of maintenance and upkeep for many years, it makes sense at the outset to purchase a relatively new property of sound construction to help you keep these overheads as low as possible for as long as possible.
SMSF commercial property investment
It is also possible to use a SMSF to buy commercial property, and this gives you a little more flexibility when compared to residential property purchases. Therefore, this might be a useful option to help you fund your retirement.
- SMSF can be used to purchase offices, retail spaces, factories, serviced apartments, etc.
- A commercial SMSF property can be leased to a business that is owned or operated by a member of the fund, provided rents are charged at market rates.
- Your SMSF can acquire property indirectly through listed and unlisted property trusts.
- Real estate investment trusts (REITs) are also an option.
- A specific type of loan is required, which will have stricter criteria than other types of loan in terms of the loan-to-value ratio (LVR).
SMSF property investment in NSW, QLD and VIC
There is no question that Australia in general and eastern seaboard of Australia in particular are experiencing the first major housing boom in a generation, with prices set to rise by as much as 16% by the end of 2022.
However, it is important not to get swept up in the excitement of it all. As described above, SMSF property investment is a long term strategy, and so the guidelines regarding location, rental yield and maintenance costs still apply.
Therefore, when you are considering areas for a SMSF residential property investment, look for the following:
- Larger conurbations that have within them suburbs that showed a significant increase in house prices in 2020 and the first part of 2021;
- Strong local economies that are not limited to a single industry;
- Areas which have in recent years experienced significant population growth;
- Regions, districts or suburbs with significant new or planned infrastructure developments e.g., roads, rail, retail, etc.; and/or
- Areas where there is the potential to purchase dual income property, as this increases your rental yield in the short term and can realise greater returns over time.