6 Things You Need To Consider Before Buying Property With Your SMSF

Posted on 17th April 2023

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The Australian love affair with buying property has never been more evident as more and more people are looking to purchase a property. Even though buying property through your SMSF might seem appealing, you should consider some essential factors before leaping.

Just because everyone is buying property doesn’t mean you shouldn’t think things through. You may face legal and financial issues that negatively affect your retirement savings without weighing your options.

This article highlights the factors you should consider before buying a property with your SMSF to help you make an informed decision.

Factors To Consider Before Purchasing Property With An SMSF

1. Suitability

Not all properties are suitable for investment through your SMSF. Your investment strategy should align with your long-term goals and offer a good ROI (Return On Investment). If the property isn’t suitable, you’ll have an underperforming asset.

To assess a suitable property, you must evaluate its rental income potential and capital growth. You must also consider rental demand, property type, capital appreciation potential, location, and vacancy rates.

For instance, if the property is located in an area with high demand, reasonable rent, and excellent capital appreciation potential, it’s more suitable for your SMSF investment than a property in a low-demand area.

Moreover, the ATO (Australian Taxation Office) mandates SMSF trustees to invest in assets that are in the best interests of the fund’s members and align with their investment strategy. Consequently, the ATO may view purchasing an unsuitable asset as a breach of its regulations resulting in legal implications and penalties.

2. Financial Capacity

Since investing in property incurs substantial upfront and ongoing expenses, you must consider the SMSF’s financial capacity. The costs involved in investing in property include repair and maintenance, property management, stamp duty, legal fees, and purchase cost.

If the fund doesn’t have adequate finances to cover the expenses, borrowing funds will be necessary. Borrowing money will negatively affect the fund’s financial health and expose it to risks.

Further, taking out a loan to buy a property with an SMSF requires strict adherence to SMSF borrowing regulations. These laws are usually complex and attract penalties if they aren’t followed.

Obtaining a loan to buy a property with your SMSF is challenging, as most banks don’t lend to SMSFs. Other financiers have tightened their approval process; thus, borrowing from a related party may be the only option.

When an SMSF invests a substantial amount of its funds in one asset, it overexposes itself to economic downturns and market fluctuations. Therefore, it’s vital to have a diversified investment portfolio that balances the return and risk.

3. Compliance

As mentioned earlier, the ATO has set strict guidelines for SMSFs. Failure to comply with the guidelines can have severe consequences like disqualifications, penalties, and legal issues.

An essential compliance issue to consider is the sole purpose test, which requires that when an SMSF invests in property, it should do so to provide the members with retirement benefits. This means the property can’t be used for personal benefits, like using it as a holiday home.

Related party transaction is another critical compliance issue that entails buying or selling an asset to a related party like the SMSF’s member. Such transactions should adhere to the set regulations and be at arm’s length to avoid conflicts of interest.

4. Professional Advice

Before purchasing property with an SMSF, you should seek professional guidance because it’s a complex process that needs to be done with strict adherence to ATO guidelines. An oversight or mistake can lead to legal issues and penalties.

Experienced SMSF advisers can offer valuable advice on the property to invest in and ensure that the investments align with your long-term goals and investment approach. You should also consult a legal expert to comply with ATO guidelines.

Alternatively, consider buying property with your SMSF by HALO Technologies. The HALO technology platform offers administrative solutions that can offer you the tools to navigate SMSF investment and administration complexities.

5. Structure

An SMSF’s structure can affect its ability to invest and tax implications. There are two ways an SMSF can invest in property; directly or through a struct structure.

When an SMSF buys property directly, it purchases it in the fund’s name. In contrast, buying the property through a trust structure entails using a separate legal entity.

Buying property through an SMSF structure offers financing and ownership flexibility since multiple investors can pool their funds to invest in the property.

This helps minimize the risk and diversify the fund’s investment portfolio. Using the trust structure also comes with various tax benefits, like distributing capital gains and income among unit holders.

Buying property directly in the fund’s name offers greater transparency and control over the investment. However, it exposes the fund to risk if the property performs poorly and limits its ability to borrow.

6. Prepare For The Unexpected

Having a contingency plan with protect your SMSF when unexpected issues arise. If the property you’re purchasing is rented, you must prepare for tenant issues such as rental arrears and disputes. You should have a plan on how you can efficiently deal with these issues when they arise.

Economic downturns can significantly impact rental income and property prices. Therefore, you must plan how to weather economic storms and ensure the fund meets its financial obligations.

You can plan for the unexpected by setting aside an emergency fund to cover unexpected costs like maintenance. You should also get insurance coverage to protect the property from fire, natural disasters, and theft.

Bottom Line

Buying property with your SMSF can be a profitable investment opportunity. However, buying a property with your SMSF is a complex process that needs careful consideration.

Ensure you do your due diligence and seek professional advice to make an informed purchase that aligns with your long-term goals and investment strategy.