Most of you know what an SMSF is, but for those of you who don’t it is a self managed super fun that is a superannuation scheme. It is set up to provide retirement income for the people who are tied to the fund. It is basically a trust where the beneficiaries are also the members of the SMSF.

Now for those of you who know what an SMSF is or maybe have one themselves then you also know that SMSF and property investment can go together. You might not be crystal clear on how you can mix your self managed super fund with property though. Well, it’s actually quite simple if you want to invest in a residential property. There are a few things you will need to consider before you take that step and today we will be going over all of that. However, if you want to know more about how SMSF and property mix and what you need to do to ensure you are in compliance with ATO rules, it’s best you turn to professional adviser.

There are a few rules set in place when you start an SMSF. It is important that you are complying by the self managed super fund rules when it comes to property investment in order to invest in property yourself. The property you choose must meet something called the sole purpose test where it should only be providing retirement benefits to those who are fund members. You cannot invest in a property if it comes from a related party of a member in the SMSF. Also, no member of the SMSF can live on the property as well as anyone related to the SMSF members nor can you rent out the property to someone in the fund or any of their relatives. It is important to note that you are not obliged to invest in residential property only – you can also purchase a business premises to rent to your SMSF at the average market rate.

You might be also wondering about the costs involved. There are a few SMSF fees and charges that can add up and reduce your superannuation balance which you should know about before you go ahead and invest in property with your SMSF. Some of the fees and costs could include upfront fees, bank fees, legal fees, ongoing property management fees, advice fees and stamp duty. You should also be wary of groups of advisers that only seem to recommend each other. You should always look for independent advicer and make sure that anyone giving you advice has an Australian Financial Services License.

Lastly, you need to know all about SMSF borrowing or gearing your super into property investment. There are very strict conditions that are referred to as a limited recourse borrowing arrangement. This arrangement can only be used to purchase property which is either residential or commercial. There are certain risks that come with this kind of investment that you should know about before you decide. The first is that property loans that are tied to an SMSF tend to cost more compared to other property loans. Any repayments must come directly from the SMSF meaning that you must always have enough cash flow in meet the repayments. If your documentation isn’t set up properly you may even be forced to sell the property which could also result in losses to your SMSF. You also cannot alter the property in any way until the SMSF loan has been paid off completely.