Real estate is a rewarding investment opportunity and a favourite passive income
source. But with rising property costs and increased demand, finding the right
investment venture and procuring the resources for it has become a challenge.
Therefore, the question looms- can you buy an investment property with your Super?
Yes, you can but conditions apply. We’ll discuss all the rules, structures, and
risks regarding buying an investment property with your Super. But before that, let’s dig
in the basics.
Table of Contents
What do we mean by Super?
Super refers to a Self-Managed Super Fund. As the name suggests, it’s a private fund
managed by the individuals themselves. The number of members in SMSF are limited
to six. As a member you’re also the trustee of the fund and therefore, responsible for
complying with Super laws and proper management of the fund. Since you manage
your own fund, you have direct control over investing your superannuation.
Key Features of an SMSF
- Up to 6 members allowed
- All members act as trustees and are legally responsible
- Full control over investment strategy
- Must comply with ATO regulations and annual audits
Is it possible to buying an investment property with your Super Funds?
You can utilise your Super Funds to buy an investment property, given that it’s
purchased for purely investment purposes and not for future occupancy by the
members or their relatives. It can’t be rented to members either. Only third-party
occupancy is allowed. The sole purpose of the investment property must be to provide
retirement benefits to the fund’s members, also called “sole purpose test”.
What are the different methods of buying an investment property with your Super Funds?
There are two main ways to use Super funds to buy an investment property:
- Direct use of SMSF funds to pay for the property.
- Use of a special structure called Limited Recourse Borrowing Agreement (LRBA)
| Method | Description |
|---|---|
| 1. Direct Purchase | Use existing funds in your SMSF to buy property outright. |
| 2. Limited Recourse Borrowing Arrangement (LRBA) | Borrow through your SMSF using a special loan structure. |
What is LRBA and how does it help?
Limited Recourse Borrowing Agreement is one of the ways you can borrow money
using your SMSF. It’s an arrangement where an SMSF trustee obtains a loan to buy an acquirable asset. However, the purchased asset is held in a separate trust called the
holding trust. Only after the repayment of loan does the trustee obtain rights to legal
ownership of the asset. This loan is only against the asset purchased, thereby
safeguarding lenders’ access to the fund’s other assets in case of loan default. The
rental income from the assets received by the SMSF goes towards loan repayments
and expenses.
Direct Purchase vs LRBA
| Feature | Direct SMSF Purchase | LRBA (Borrowing via SMSF) |
|---|---|---|
| Source of Funds | SMSF funds only | Part SMSF funds + external loan |
| Ownership | Immediate ownership by SMSF | Legal ownership after full loan repayment |
| Loan Recourse | Not applicable | Limited to the purchased asset only |
| Risk to Other SMSF Assets | None | Protected – lender can’t access other SMSF assets |
| Use of Rental Income | Passive income to SMSF | Goes towards loan repayment |
| Complexity | Lower | Higher – requires compliance with LRBA laws |
Can you only purchase a specific type of property with Super money?
With your SMSF funds, you can purchase both residential and commercial properties.
However, there are strict rules in place regarding occupancy and lease, which must be
complied with by all trustees, such as:
- Fund members or their relatives can’t reside in the residential property.
- Residential property is not available to fund members or relatives for rental purposes and must be held purely for investment purposes in the best interest of all the fund members.
The rules regarding commercial properties are slightly flexible. A commercial property
obtained with Super can be leased to a business owned by a fund member at the
current market rates.
Are there any benefits of buying property with Super funds?
The benefits of buying an investment property with your super are:
- Super funds benefit from concessional tax rates. As the super funds provide retirement benefits, after retirement income and capital gains can be tax-free.
- It allows you to diversify your portfolio in addition to stocks and other investments, increasing your long-term returns.
- SMSF assets are out-of-reach of creditors, providing you with a safety net in hours of need.
- SMSF offers complete control over fund management, allowing you to make contributions and take investment decisions that best align with your retirement goals.
Even though buying an investment property with your Super offers benefits, it comes
with its own set of risks. ATO regulates SMSFs, therefore the trustees must comply with
their auditing and reporting obligations apart from the sole purpose test and investment
strategy requirements. Setting up and managing a Super fund can be costly and
complex, not to mention the LRBA set-up and interest rates. At Blue Chip Properties,
we help you purchase the hottest investment properties in Melbourne with your SMSF.
For more details, give us a call and request your free consultation today!
