A Short Guide to Property Investment through Self-Managed Super Funds (SMSFs)
- Jaeneen Cunningham
- 6 days ago
- 5 min read
For many Australians, property has long been a favourite way to grow wealth. Combine that with the flexibility of a Self-Managed Super Fund (SMSF), and you have a powerful tool for building retirement savings. But investing in property through an SMSF isn’t as simple as buying real estate in your personal name. It requires the right structure, strict compliance, and careful planning.
This guide will walk you through the essential steps of setting up your SMSF for property investment, obtaining the right loan, and understanding the tax advantages—particularly in retirement phase.
Step 1: Establishing Your SMSF and Investment Strategy
The first step is ensuring your SMSF is properly set up and structured to comply with Australian Taxation Office (ATO) requirements.
An SMSF can have up to four members (or six under more recent changes), and all members must also be trustees (or directors of a corporate trustee). As trustees, you and the other members are legally responsible for making sure the fund complies with the rules.
Investment Strategy
Every SMSF must have a written investment strategy. This isn’t just a tick-the-box document; it’s the backbone of your fund’s decision-making. The strategy should outline:
The types of assets the fund will invest in (including property).
The level of risk the trustees are comfortable with.
How the fund will maintain liquidity (important if buying a large illiquid asset like property).
How investments will be diversified.
How the fund will pay member benefits when they fall due.
When property is on the table, the strategy needs to clearly justify why this asset class is suitable for the members’ retirement goals. Auditors and the ATO will want to see that the property fits into the broader picture of retirement planning, not just a standalone purchase.
Step 2: Structuring the Property Purchase with a Limited Recourse Borrowing Arrangement (LRBA)
Most SMSFs don’t have enough cash sitting in the fund to buy a property outright. This is where borrowing comes in. Unlike personal loans or standard home loans, SMSFs must use a specific structure called a Limited Recourse Borrowing Arrangement (LRBA).
Under an LRBA:
The SMSF trustee takes out a loan to purchase a single property.
The property is held in a separate trust, often called a “bare trust,” until the loan is fully repaid.
The lender’s recourse is limited to the property itself—meaning if the fund defaults, the lender cannot seize other SMSF assets.
This structure protects members’ retirement savings while allowing the fund to gear into property. But it also makes SMSF lending more complex and restrictive compared to traditional loans.
Step 3: Understanding SMSF Loan Types and What Banks Look For Property Investment
Not all banks and lenders offer SMSF loans, and those that do often apply stricter conditions. Lenders want to be confident that the SMSF can meet its obligations under the LRBA.
Loan Types
Variable Rate Loans: Flexible repayments, but subject to rate changes.
Fixed Rate Loans: Provide repayment certainty, though less flexibility.
Principal & Interest Loans: More common, ensuring the fund is actively reducing debt.
Interest-Only Loans: Available from some lenders, but usually for a limited term.
What Lenders Look At
When assessing an SMSF loan, banks typically consider:
Fund Balance: Most lenders want to see at least $150,000–$200,000 in super before they’ll consider an SMSF loan.
Contribution History: A consistent pattern of member contributions reassures lenders that the fund has ongoing cash flow.
Rental Income: Expected rental returns from the property are factored into serviceability.
Liquidity: Even after the property purchase, the SMSF must retain enough liquid assets to cover costs and benefits.
Loan-to-Value Ratio (LVR): Lenders generally require a deposit of 20–30%.
Trustee Experience: Some lenders prefer trustees with prior investment experience.
Banks are conservative with SMSF lending because the compliance rules are strict and the borrower is a trust rather than an individual. This makes it especially important to work with brokers and advisers who specialise in SMSF lending.
Step 4: Managing the Property and Compliance
Once the SMSF acquires the property, the compliance work doesn’t stop. The fund must:
Ensure the property is held in the correct name (the bare trustee, on behalf of the SMSF).
Collect rent at market value (particularly important if leasing to a related business in the case of commercial property).
Cover expenses like rates, insurance, and loan repayments directly from the SMSF.
Obtain annual property valuations for audit purposes.
For commercial properties, if your business is the tenant, the rent must be set at arm’s length—no mates’ rates allowed. For residential property, remember that members and relatives cannot live in or rent the property under any circumstances.
Step 5: Unlocking the Tax Benefits of SMSF Property
One of the main attractions of property in an SMSF is the tax treatment.
In Accumulation Phase
Rental income is taxed at just 15% (compared to personal tax rates that could be much higher).
Capital gains on properties held more than 12 months receive a one-third discount, reducing the effective tax rate to 10%.
In Pension Phase
This is where the real magic happens. Once members move into retirement and start drawing a pension from the SMSF:
Rental income becomes tax-free.
Capital gains are also tax-free on assets supporting retirement phase pensions (subject to the transfer balance cap, currently $1.9 million per member).
This means that if your SMSF holds a property long-term and sells it in retirement, the fund may not pay any tax at all on the profit. For many, this is the ultimate payoff for the extra work and compliance involved in SMSF property investment
Step 6: Weighing Costs and Benefits
While the tax benefits can be substantial, SMSF property investment isn’t for everyone. The costs can include:
SMSF setup and legal advice.
Ongoing administration and audits.
Loan establishment fees.
Property purchase costs (stamp duty, legal, inspections).
Higher loan interest rates compared to standard home loans.
Balancing these costs against the potential benefits is crucial. Property can be a powerful wealth builder inside super, but only if the numbers stack up.
Final Thoughts
Investing in property through an SMSF is not a “set and forget” strategy. It requires the right structure, a clear investment strategy, careful borrowing arrangements, and ongoing compliance. But when done properly, it can offer unique benefits—especially when you consider the potential for tax-free income and capital gains in retirement.
For business owners, an SMSF can even provide the chance to own your commercial premises within your super, turning rent into a long-term retirement asset.
Call to Action
At Etairos Finance, we help Australians navigate the complex but rewarding process of SMSF property investment. From structuring your fund and building the right investment strategy, to sourcing SMSF loans and ensuring compliance, our experienced team is here to support you.
We’re friendly, knowledgeable, and committed to helping you make smart financial choices for your future. If you’re thinking about property investment through your SMSF, talk to Etairos Finance today.
General Advice Warning: The information in this article is provided as general information only and does not take into account your individual objectives, financial situation, or needs. Investing in property through an SMSF and using borrowing arrangements such as Limited Recourse Borrowing Arrangements (LRBAs) can involve significant risks, costs, and compliance obligations. Before acting on this information, you should consider its appropriateness for your circumstances and seek advice from a licensed financial adviser, accountant, or SMSF specialist.
Comments