Everything you need to know about buying property through an SMSF 

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Buying property through a self-managed superannuation fund (SMSF) is often pitched as a powerful wealth-building strategy, particularly for Australians looking to take greater control of their retirement savings.

If you are considering this, the first thing you need to know is that SMSF property investing operates under a tightly regulated framework. Get it right, and the long-term tax outcomes can be compelling; get it wrong, and you can find yourself facing liquidity stress and compliance breaches.

As such, we asked experts questions you may have about investing in property through an SMSF. In this Q&A, we break down how SMSF property purchases work in practice, why Limited Recourse Borrowing Arrangements (LRBAs) are critical, how SMSF loans differ from standard home loans, and the tax, cash flow, and exit strategy considerations that trustees may underestimate.

Disclaimer: Note that this article is intended as general information only and should not be considered financial or investment advice. The views and opinions expressed by the external experts are their own and do not necessarily reflect the position of loans.com.au. Readers should seek independent advice from a licensed financial adviser, registered tax agent or accountant, mortgage broker, and legal professional before making any decisions relating to property investment within a self-managed superannuation fund.

Meet the experts:

• Jeremy Douglas - Principal Financial Adviser at Summit Financial Planning

• Gianni Musumeci - Founder of Leverage Property Adviser

• Rasti Vaibhav - Property Wealth Strategist and CEO of Get RARE Properties

Question 1: Who does buying a property through an SMSF generally suit?

Jeremy Douglas: Educated investors with super balances of at least $200k

"Generally speaking, it suits educated investors with super balances of at least $200K and are prepared to be guided by licensed professionals regarding all of the compliance requirements.

"The investor should have a working knowledge of what their overall investment strategy is and be prepared to have around 3-5 months of working capital set aside."

Gianni Musumeci: Investors who like a more hands-on approach to investing

"Purchasing property via SMSF generally appeals to those investors who would like a more direct and hands-on approach to investing. It's also a way for investors to diversify away from traditional assets like shares, managed funds, and cash assets. "

Question 2: Who may be less suited to buying a property through an SMSF?

Rasti Vaibhav: Investors with small balances

"Those with small balances, irregular cash flow, or who expect to start a pension soon and will need liquidity are recommended to seek alternative investment solutions.

"Also, avoid if you want to stay in the property or rent it to family."

Mr Douglas: Investors unwilling to be guided by professionals

"If they don't listen to their fund accountant and administrator, aren't prepared to be flexible with finding time to sign documents, and have a general blasé attitude regarding their obligations, just having a simple industry or retail fund might be a better fit."

Jeremy Douglas, principal financial adviser at Summit Financial Planning (Image supplied)

Question 3: How does purchasing a property through an SMSF work in practice, and how does it differ from buying in your own name?

Mr Musumeci: SMSF property is owned by the fund, not the individual

"Purchasing property through an SMSF involves using superannuation funds to buy and hold an asset to support retirement savings. Any income or gains, after costs, remain within the SMSF and can only be accessed once specific release conditions are met.

"Unlike buying in your own name, the property is owned by the SMSF and held in trust. This structure also allows access to certain superannuation tax concessions that are unavailable to individual investors.

Mr Vaibhav: Buying property through an SMSF entails an additional layer

"In your own name, you focus on finance, contracts, and settlement. In an SMSF, there is an additional layer: an investment strategy, arm's-length terms, and often a holding trust, particularly when borrowing is involved. Everything must be documented and market-based.

Question 4: What is a Limited Recourse Borrowing Arrangement (LRBA) and why is it essential to most SMSF purchases?

Mr Douglas: An LRBA limits a lender's recourse to the property only

"A Limited Recourse Borrowing Arrangement is simply the borrowed money or mortgage the SMSF takes out to buy property, structured to meet SIS legislation. SMSFs are prohibited from borrowing unless it is through an LRBA.

"Under this structure, the lender's right to recourse is limited to the property itself if the SMSF defaults, unlike personal borrowing, where other assets can be pursued."

Question 5: How much deposit is typically required for an SMSF property loan, and why is it higher than standard home loans?

Mr Douglas: Prepare a 25-30% deposit

"Typically, you would want a 25% deposit for residential property and 30% deposit or more for a commercial property, and these types of loans are generally higher than normal loans as the lender is taking on a lot more risk because it's financed via an LRBA."

Mr Vaibhav: Expect lower borrowing limits and higher upfront costs

"Expect residential SMSF LVRs to be in the 70-80% range, and commercial LVRs to be often 60-70%. The higher deposit reflects limited recourse for the bank, a smaller lender pool, and the liquidity risk of property inside super. You also need to budget for stamp duty, legals, the bare trust, lender fees, and buffers in the fund."

Rasti Vaibhav, property wealth strategist and CEO of Get RARE Properties (Image supplied)

Question 6: How do SMSF loans compare with regular investment loans, and what does that mean for returns?

Mr Vaibhav: SMSF loans typically have higher interest rates than regular investment loans

"Rates, fees, and documentation are usually heavier than those of a standard investment loan. That increases your hurdle rate.

"Returns rely more on rental quality, low vacancy, and disciplined expenses. A sharp buy price helps, but in an SMSF, you win or lose on cash flow discipline."

Mr Douglas: SMSF loans' interest rates are around 1-2% higher than regular investment loans

"Generally speaking, SMSF loans' interest rates are around 1-2% higher than regular investment loans, and there's a lot more fees involved in the setup due to the nature of LRBA.

"However, it's important to remember that SMSF loan repayments are often funded from superannuation contributions and fund income, with concessional contributions taxed at 15%. While interest rates in the SMSF environment are typically higher, differences in tax treatment can mean the overall cost is sometimes more affordable than holding the same loan in your personal name.

"Outcomes vary depending on individual circumstances, contribution caps, and cash flow, so it's essential to check with a licensed professional first."

Question 7: How important is cash flow within the fund, and what happens if rental income falls short?

Mr Douglas: Cash flow is important as this is used to pay the SMSF loan

"Just so long as the debt obligations for the period are met, then there's no underlying issue if rental income falls short. It's not as if rental income has to exceed rental property costs every period or there's some kind of issue.

"Just like any mortgage, you just have to make your fortnightly/monthly payments, and sometimes unexpected costs arise (e.g., property maintenance), hence it's always a good idea to have around three months' worth of working capital on hand."

Mr Vaibhav: Map your best case, base case, and lean case

"In a lean case, if rent dips or rates jump, the fund must still meet repayments and costs from contributions or other assets. If it cannot, you may be forced to sell at the wrong time.

"Plan for a 3% rate shock and six to 12 months of reduced rent without breaking a sweat."

Question 8: What are the key rules around who can live in, rent, or use an SMSF-owned property?

Mr Musumeci: The property must meet the sole purpose test

"The key rule is that all SMSF property must meet the Sole Purpose Test and be held solely to provide retirement benefits to members. Therefore, members, relatives, or other related parties cannot live in, holiday in, or personally use the property, and it must be held and managed at arm's length.

"In limited circumstances, property that qualifies as business real property may be leased to a related party, provided the lease is conducted strictly on an arm's-length basis and at market rates."

Strict rules govern who can rent an SMSF-owned residential property. (Image by Jakub Zerdzicki on Pexels)

Question 9: What types of property are permitted for SMSFs?

Mr Douglas: SMSFs can generally acquire residential or commercial property

"SMSFs can generally acquire residential or commercial property, provided the investment meets SMSF rules (including the sole purpose and arm's-length requirements) and aligns with the fund's investment strategy.

"As a rule, SMSFs are generally prohibited from acquiring assets from related parties, with limited exceptions - most notably where the asset qualifies as business real property and is acquired at market value on arm's-length terms."

Question 10: Why is commercial property often considered more suitable for SMSFs than residential property?

Mr Vaibhav: Commercial property can offer practical advantages for SMSFs

"Commercial works neatly because a member's business can lease the property at market terms, under a formal, arm's-length agreement, providing clear documentation and transparent rental arrangements.

"Residential still makes sense for diversification, simple tenancy, and long holding periods, as long as tenants are unrelated and the numbers stack up without rosy assumptions."

Question 11: What are the risks of having a large portion of an SMSF tied up in a single, illiquid property asset?

Mr Musumeci: Diversification, liquidity, and market timing risks

"There are a number of risks associated with having the majority of funds tied up in illiquid assets:

• Diversification risk - where the majority of an SMSF's funds are invested in a single asset class, making it more exposed to market volatility compared to a diversified portfolio.

• Liquidity risk - where limited cash reserves may make it difficult to cover expenses or meet minimum pension payment requirements in retirement.

• Market timing risk - where the need to sell a property to meet liquidity requirements could force a sale during a market downturn, potentially resulting in a loss.

Mr Vaibhav: Illiquidity is a feature of property, not a flaw

"Concentration risk, lumpy expenses, valuation swings, and the risk of having to sell in a soft market to meet pension or compliance cash flow needs are all real considerations. Illiquidity is a feature of property, not a flaw, so you must design around it with buffers and timelines."

Question 12: What are the tax advantages of holding property in super?

Mr Vaibhav: Patient SMSF investors can be rewarded at tax time

"Inside super, earnings are generally taxed at 15%. For assets held longer than 12 months, the one-third CGT discount reduces the effective rate to 10%. In retirement phase, income and capital gains on assets supporting pensions may be exempt under ECPI, subject to the transfer balance cap and other applicable rules.

"This tax treatment favours long-term, well-documented investment strategies."

Question 13: What ongoing costs and administrative burdens trustees often underestimate when holding property in an SMSF?

Mr Douglas: Many trustees aren't surprised by ongoing costs so much as by the visibility of costs

"It's not so much that costs are underestimated, but that for many members it's the first time they can clearly see what it actually costs to run a fund. Most new SMSF trustees come from industry or retail funds, where fees are expressed as percentages and rarely scrutinised.

"With an SMSF, members see money leaving the fund's bank account, which can feel confronting - particularly when repaying an LRBA - even though similar costs existed in their previous fund."

Mr Musumeci: Ongoing costs when holding property in an SMSF

Ongoing costs and administrative burdens can include:

• Accounting fees

• Independent SMSF audit fees

• Compliance and administration fees

• ASIC annual review fees (for corporate trustees)

• Valuation fees (as required)

• Property management fees

• General insurance costs

• Loan establishment and ongoing loan servicing fees

• Ongoing property holding costs (council rates, land tax, water rates, strata levies where applicable)

• General property maintenance and upkeep costs

Gianni Musumeci, founder of Leverage Property Adviser (Image supplied)

Question 14: What level of trustee involvement is realistically required year to year?

Mr Douglas: It can be as little or as involved as you want

"We always recommend engaging licensed professionals to manage the administration, this is not a legal requirement. If you're educated on what's required, you have discretion to run the SMSF yourself, but unless you have significant experience or professional education in this space, it can be risky."

Mr Vaibhav: Trustees should expect a steady rhythm

"Confirm rent is at market, review insurance, stay on top of maintenance, check your buffers, document any related-party dealings, and keep the investment strategy current. It is not a set-and-forget. It is a once-a-quarter check-in and an annual deep tidy-up."

Question 15: What challenges arise when selling an SMSF property, and why is having an exit strategy so important upfront?

Mr Vaibhav: Timing, liquidity, and LRBA lender discharge can make exits clunky

"You also need clean valuation evidence and arm's-length sale terms. Some funds sell on the open market; others (often with commercial property) may consider an in-specie transfer as a lump sum once a condition of release is met. Either way, know your exit options before you sign the contract to buy."

Mr Douglas: Exit strategy is important

"An exit strategy is very important as it explains in detail how the fund intends to sell down the underlying property and manage liquidity eventually. While it isn't a standalone legal requirement, it is strongly recommended by the ATO that these considerations should be clearly addressed within the fund's overarching investment strategy documents, particularly given the illiquid nature of property."

Question 16: What are the biggest financial risks of holding property inside an SMSF?

Mr Musumeci: Holding property inside an SMSF can increase exposure to certain financial risks

"Some of the biggest include:

• Market risk - Property values are subject to capital gains and losses. If values fall, SMSF members may not have sufficient time before retirement to wait for a recovery and could be forced to sell at a loss, reducing final retirement benefits.

• Diversification risk - Where the majority of a member's superannuation is allocated to a single asset, the fund becomes more exposed to diversification risk. Investing across multiple asset classes can help reduce the impact if one market underperforms.

• Liquidity risk - SMSFs require liquidity to meet ongoing costs and obligations. Property is illiquid and can take time and money to sell, meaning the fund may struggle to meet liquidity requirements if cash reserves are insufficient.

Question 17: In your experience, what causes an SMSF property strategy to go wrong?

Mr Vaibhav: Cash flow, quality, compliance

"Three themes consistently cause SMSF property strategies to go wrong: thin liquidity with no buffers; spruiker pressure into off-the-plan or poor-quality stock where the numbers don't stack up; and documentation that fails to demonstrate arm's-length dealings, particularly with related parties.

"Cash flow, quality, compliance. Miss one and the tripod falls."

Mr Douglas: Poor initial structuring, unrealistic expectations, lack of communication

"Generally speaking, if an SMSF property goes sideways, it's almost always due to one or more of the following reasons: poor initial structuring, unrealistic expectations, lack of communication. For example, documents not being signed and they've just been "too busy" to get around to it and trying to save small upfront costs, which end up being huge problems later on.

Mr Musumeci: Avoiding seeking professional advice

"I've seen some avoid seeking professional advice due to the associated costs and instead rely on Facebook groups, property forums, and even AI. They then use online services to create an SMSF and begin the process of purchasing property. This approach often bypasses a lot of professional advice where the investor may discover the complexity of starting an SMSF, the compliance requirements, and whether it is suitable for their financial situation, goals, and objectives."

Question 18: What red flags should ring alarm bells before someone buys property through an SMSF?

Mr Vaibhav: If you wouldn't show it to an auditor, don't proceed

"One-stop packages with hidden commissions, rental guarantees in weak locations, pressure to sign quickly, advice that glosses over the Sole Purpose Test, and deals where the 'paperwork will be sorted later' should all ring alarm bells. If you would be uncomfortable showing your documents to an auditor, stop."

Mr Douglas: Marketing that implies SMSF property is suitable for everyone

"Common examples we've seen include one-size-fits-all messaging paired with heavy sales pressure, where discussions around compliance, liquidity, and alternative investment options (ETFs, managed funds, etc.) are downplayed or brushed aside."

Question 19: What's the single most important question trustees should ask themselves before proceeding?

Are you really ready? (Image by Freepik)

Mr Musumeci: "Is this strategy most appropriate for my goals, risk tolerance, and investor sophistication level?"

"A lot of investors don't realise the complexity, risk, and foresight to understand if this complex investment strategy is right for their needs."

Mr Douglas: "Have I thought through all the alternatives and am I still happy to proceed with it?"

"You should also ask yourself whether you are aware of the increased responsibilities as trustees or directors. While administrators handle compliance, SMSFs require long-term commitment, time, and cost."

Mr Vaibhav: "If rent paused and rates rose by 3%, could our fund meet all costs and any pension payments for at least a year, without breaking the rules or selling in a hurry?"

"If the answer is no, the strategy is not ready."

If you’re ready to explore property investing through SMSF, loans.com.au offers specialist SMSF loans for residential and commercial properties. Book your free consultation with one of our SMSF lending experts today.

Header image by Alef Morais on Unsplash