What every Aussie family should know about investing in property with SMSF

Thinking about buying property through your super? You’re not alone. Many Australians are exploring SMSF (Self-Managed Super Fund) property investment. It sounds appealing—using your retirement savings to buy an investment property—and it can be a powerful wealth-building strategy. 

But like all investments, there are rules and responsibilities.

This article will break it down for you: what you can and can’t do, the benefits you may gain, and how it can help you and your family prepare for the future.

What is an SMSF?

An SMSF is a private super fund that you manage yourself. Unlike retail or industry super funds, you’re in control of the investments—whether that’s shares, cash, or property. But with control comes responsibility, as the Australian Taxation Office (ATO) has clear rules to make sure your SMSF is used only for retirement purposes.

Can you buy property in an SMSF?

Yes, you can, but there’s a catch—you can only buy property under certain conditions. 

The property must meet the “sole purpose test”, which means it must be used only to provide retirement benefits to fund members. You can’t live in it, holiday in it, or rent it to family members. If you do, you risk losing your super tax concessions and facing penalties.

Example: Let’s say you buy an apartment through your SMSF. You can’t let your adult child live in it rent-free, even if they’re struggling financially. That’s considered a personal benefit and breaches the sole purpose test. 

What kind of property can you buy?

Image: Freepik

You can buy:

• Residential property (must be from an unrelated party)
• Commercial property (including leasing to your own business, if structured properly)
• Business real property (land and buildings used wholly and exclusively in a business).

You cannot buy:

• A holiday home for personal use
• Property from a related party (unless it qualifies as business real property)
• Property that will be used by fund members or relatives.

Borrowing to buy property through your SMSF

If your SMSF doesn’t have enough cash to buy a property outright, you may be able to borrow through what’s called a Limited Recourse Borrowing Arrangement (LRBA). This allows your fund to use a loan to purchase an investment property, with the loan secured only against that property — not your other super assets.

Borrowing can make your super work harder by letting you invest in a larger asset sooner. However, there are strict rules to follow:

• The property must be held in a separate trust until the loan is repaid.
• Borrowed funds can only be used to acquire the property, not improve it (for example, you can’t build a house on vacant land).
• All transactions must be at arm’s length — no discounts, inflated prices, or family rentals.

Getting the structure right from the start is critical. SMSF loans are more complex than standard home loans, so it’s important to work with professionals who understand the rules. Our trusted mortgage partners at Watson Mortgages can guide you through the lending process and ensure your SMSF loan is set up correctly.

Example: If your SMSF buys a block of land, you can’t use borrowed money to build a house on it. That’s considered an improvement and is not allowed under LRBA rules.

 Potential benefits of SMSF property investment

Image: Freepik

Despite the rules and setup costs, property inside super can offer significant long-term advantages for the right investors.

Leverage and growth

Property is one of the few assets you can borrow against inside super. This means your fund can use leverage to potentially accelerate capital growth. 

Example: Your SMSF has $400,000. Instead of buying $320,000 worth of shares, you use that as a 40% deposit to purchase a $800,000 property with a loan for the rest.

• Over time, your rental income and super contributions help pay down the loan.
• If the property grows at 5% per year, after 10 years it would be worth about $1.3 million. That’s a growth of around $500,000.
• By comparison, if you simply invested your $320,000 directly (without leverage) at the same 5% return, it would grow to about $520,000—a gain of only $200,000.

This is the power of leverage and compounding growth inside super which can significantly accelerate wealth creation.

Business property ownership 

If you run a small business, your SMSF can buy the property your business operates from — and your business can lease it back from the fund at market rates. This can deliver a win-win outcome:

• Your business pays rent (which is tax deductible).
• The rent becomes income for your SMSF, taxed at only 15% (or even 0% in pension phase).
• You gain security of tenure for your business while growing your retirement assets.

Example: Milly is a local pharmacist who has been renting the building where she runs her busy pharmacy. After years of paying rent to someone else’s pocket, Milly decided to setup a Self-Managed Super Fund (SMSF) to buy the property instead.

Through her SMSF, she purchased the pharmacy building for $1.1 million. The pharmacy business now pays rent back to her SMSF at a 5.5% yield, which is about $60,500 a year.

Rather than that money disappearing into a landlord’s account, the rent flows directly into Milly’s SMSF, boosting her retirement savings while still providing her business with a secure, long-term premises. In this way, she’s not just running her pharmacy; she’s also investing in her future.

What to watch out for

SMSF property investment comes with responsibilities and potential risks. It’s not a suitable strategy for everyone. Key risks include:

• Liquidity: Property is not easy to sell quickly, which can make it harder to access cash if your SMSF needs to pay benefits or expenses.
• Diversification: Tying up most of your super in one large asset can increase your exposure to market fluctuations.
• Compliance: The ATO applies strict rules. Breaching them can result in serious penalties or loss of tax concessions.
• Costs: Establishing and maintaining an SMSF with property involves accounting, legal, and audit costs that may exceed those of traditional super funds.

With the right professional guidance, these risks can be managed effectively. The key is to plan carefully and ensure your property investment fits within your broader financial and retirement goals.

 Loan-to-Value Ratios (LVRs) and Deposits 

Banks generally require larger deposits for SMSF loans compared to personal loans:

• Residential Property in SMSF: Usually 20%–30% deposit required, depending on the lender.
• Commercial Property in SMSF: Often 30%–40% deposit required, depending on the lender.

Example:

• Residential: To buy a $600,000 property, your SMSF may need around $180,000–$200,000 cash plus costs.
• Commercial: To buy a $1 million warehouse, your SMSF may need $300,000–$400,000 cash plus costs.

If you’re considering borrowing inside super, it’s important to get the structure right. SMSF loans are more complex than standard home loans, and the rules around LRBAs can be tricky. That’s where our mortgage specialists at Watson Mortgages can help—guiding you through the lending process, explaining your options, and making sure your loan is set up correctly for your SMSF.

Legal ownership and market value 

The property must be legally owned by the SMSF, and all transactions must be at market value. You can’t buy a property at a discount from a mate or sell it to your SMSF at an inflated price. Everything must be done at arm’s length.

Building your SMSF property investment strategy

Before your SMSF can purchase property, it must have a written investment strategy. This document explains: 

• Why property aligns with your fund’s objectives
• How risks and liquidity will be managed
• How the investment fits within your overall portfolio.

Your investment strategy must be reviewed regularly and updated if your circumstances change — for example, if you add new members, make large contributions, or approach retirement. A financial adviser can help you ensure your strategy remains compliant and appropriate for your goals.

The bottom line

Investing in property through an SMSF can be a powerful way to grow your retirement savings, but it requires careful planning and strict compliance. For some families, it’s a way to take greater control of their super and create long-term wealth; for others, a more diversified approach may be better.

If you’re considering this strategy, talk to the team at Elliot Watson Financial Planning. We’ll help you assess whether SMSF property investment suits your financial situation, structure your fund correctly, and keep you on track toward a confident, comfortable retirement.

Article by Jose Hernandez – Senior Financial Adviser

 

Disclaimer

The information within does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness regarding your objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the author’s express written consent. Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.