When investors discover the advantages of investing directly in property through their Self-Managed Super Funds (SMSFs), they often express interest in going down this path. However, most don’t know where to start if they haven’t done it before. We discuss how to invest directly in property within an SMSF below.
Firstly, if you are intending to buy property within your SMSF, you must pass the ‘sole purpose test’ - ie. is the sole purpose of buying the property to provide benefits for the fund members? That generally means not acquiring the property from a family member, not acquiring property which is being lived in by a fund member or related party, and not acquiring property which is being rented by a related party. So this means all SMSF appropriate properties must be purely investment properties without ulterior motives.
Secondly, securing a mortgage on an investment property within an SMSF can be a slightly more complex process as a limited recourse borrowing arrangement must be set up. As a result, SMSF mortgages tend to be more costly to set up, and once they are set up, all loan repayments come out of the SMSF. It’s a less flexible type of loan which limits what can be done with the property until the loan is paid off.
Once you have found an appropriate investment property to invest in, and you have secured appropriate funding, the process of buying the property is much the same as it is outside of an SMSF.
Jim Dionysatos, Landen’s Director, believes buying property within SMSFs is likely to continue growing in popularity:
‘If an investor has allocated a portion of their SMSF to direct property ownership, it’s a relatively simple process, albeit one which requires a little research and is helped by having a good network of professionals around you.’