The Journey of Buying Property in an SMSF

Buying an investment property through a Self-Managed Superannuation Fund (SMSF) can be a powerful way to grow retirement wealth, but the process is very different from a standard home loan. Trustees must follow strict rules set out by the Superannuation Industry (Supervision) Act 1993 and the Australian Taxation Office (ATO).

Buying Property in an SMSF

An SMSF property loan, known as a limited recourse borrowing arrangement (LRBA), involves multiple moving parts: structuring the SMSF correctly, setting up a bare trust, applying for finance, ensuring the contract of sale is written in the right entity, and finally, managing the property within the super fund. Since major banks no longer offer SMSF loans, trustees now rely on niche lenders whose policies and pricing can vary significantly.

This is where an SMSF mortgage broker plays a key role. A broker can help navigate lender requirements, compare products, and manage the loan process, while solicitors and buyer’s agents can provide support with contracts and property selection.

Below is a step-by-step journey of how SMSF trustees typically move from idea to ownership of an investment property.

Step 1: Confirm SMSF Structure and Investment Strategy

The first step is to ensure that the SMSF trust deed and investment strategy permit property investment and borrowing. This is essential for both lender approval and ongoing compliance. Trustees should confirm that the strategy aligns with the purchase and meets the sole purpose test, meaning the property is held solely for providing retirement benefits to members.

Step 2: Establish the Bare Trust to Buy Property

When an SMSF borrows to purchase property, a bare trust (custodian trust) must be set up to hold the property on behalf of the fund until the loan is repaid. The bare trustee is listed on the property title, while the SMSF retains beneficial ownership. Independent legal advice is strongly recommended at this stage to ensure the structure is correct from the outset.

Step 3: Understand the Lending Market

Since the major banks have withdrawn from SMSF lending, loans are offered by specialist and non-bank lenders. Each lender applies different rules around serviceability, deposit size, interest rates, loan features, and ongoing costs. Policies can vary significantly which is why working with a mortgage broker who specialises in SMSF loans is crucial to finding a suitable option.

Step 4: Assess Loan Serviceability and Liquidity

Lenders will closely review the SMSF’s ability to manage loan repayments. They consider the fund’s contributions history, projected rental income, existing assets, and overall liquidity. Unlike standard mortgages, SMSF loans often require larger deposits and minimum cash buffers left in the fund after settlement. Demonstrating the SMSF’s financial strength is a key part of the approval process.

Step 5: Apply for the SMSF Loan

Once the structure and financials are in place, the SMSF can proceed with the loan application. An SMSF mortgage broker manages the process by preparing documents, liaising with lenders, and comparing available products. The broker ensures that the application meets lender requirements while the trustees remain in control of the fund’s investment decisions.

Step 6: Draft the Contract of Sale Correctly

When buying the property, the contract of sale must be written in the correct legal name of the bare trustee, not directly in the SMSF’s name. Errors at this stage can cause major compliance issues and delays. Trustees should engage a solicitor experienced in SMSF property transactions to ensure the contract and entity details are correct before signing.

Step 7: Select the Investment Property

Many SMSF trustees engage a licensed buyer’s agent to help identify a property that fits the SMSF’s investment strategy. Whether residential or commercial, the property must meet the sole purpose test and comply with lender requirements. A buyer’s agent can assist in researching markets, negotiating prices, and selecting a property that works for both the SMSF and the lender.

Step 8: Settle the Property Purchase

With loan approval, bare trust setup, and contracts in place, settlement can occur. At this point, the property is legally held in the bare trust on behalf of the SMSF. Rental income is paid into the SMSF, and the fund makes the loan repayments. All income, expenses, and loan activity must be managed within the SMSF’s accounts.

Step 9: Manage Ongoing Responsibilities

After settlement, trustees must continue to comply with SMSF rules and lender requirements. This includes managing repayments, ensuring liquidity, maintaining property and insurance obligations, meeting annual audit requirements, and keeping accurate records. Since refinancing options can be more limited in the SMSF lending market, trustees should plan carefully for the long term.

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(GENERAL INFORMATION ONLY)

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DISCLAIMER: This article is provided for general information and educational purposes only. It does not constitute financial, legal, tax, investment, or other professional advice and has been prepared without taking into account your personal objectives, financial situation, or needs. This article may include perspectives from industry contributors. Contributor participation does not imply endorsement, recommendation, or preferred referral status. While reasonable care has been taken in preparing this content, no representation or warranty is made as to its accuracy, completeness, or currency. SMSF Intelligence does not accept liability for any loss or damage arising from reliance on this information or any linked materials. SMSF Intelligence does not provide financial, legal, or tax advice. Before making any decisions, you should consider the appropriateness of the information in light of your circumstances and seek advice from a suitably qualified and licensed professional.