One of the most exciting things about starting a self-managed superannuation fund (SMSF) is the possibility of buying property.

Property that you purchase in your SMSF can be transferred to you once you reach retirement age or retained in the SMSF where any income it generates will remain tax-free.

There are a lot of advantages to owning property in your SMSF. However, investing your super in property may not necessarily be the right choice for everyone and there are many things to consider before you make this important decision.

Here are a few things to look at if you are interested in purchasing a property in your SMSF:

Taking on debt in your SMSF

Changes to regulations that have allowed SMSFs to borrow funds in order to purchase property have seen many people take up this exciting opportunity. However, having debt in your SMSF is a potentially risky position to be in, and you should think carefully about whether or not it is the right decision for you.

You will also need to think about whether or not you will take a loan out from a bank or financial institution or a related party. If you do take out a loan from a related party, you need to be scrupulous in ensuring that the loan is on commercial terms as there can be some heavy financial penalties associated with non-compliance.

Is the property aligned with your investment strategy?

You need to think carefully about whether or not purchasing a property is in line with your investment strategy. Many people think about property as being one of the safest investments that they can make.

However, if investing in the property is going to mean that too much of your cash is tied up in a single asset it may not be beneficial. If you are concerned about this, a possible alternative is to invest in a cheaper property.

Does the property need any work?

The income generating potential of any property can be significantly affected by renovations (or lack thereof). However, there are some tricky compliance issues surrounding renovations and improvements to properties owned by an SMSF.

For example, if you have borrowed to purchase the property, you are unable to make any significant improvements using borrowed funds. You must also be mindful of some strict regulations surrounding working on the property yourself. Anyone thinking about renovating a property owned by an SMSF should discuss their situation with an accountant to ensure that these improvements will be a viable option.

Do you have the funds to purchase outright?

SMSF trustees who are considering investing in property need to think carefully about whether or not they should borrow in order to make a bigger purchase. In some instances, particularly where the cash flow to the SMSF is limited, it may be advisable to limit the debt as much as possible. However, it may also be a more prudent option to borrow in order to acquire a property that will have the potential to generate higher income.

What will happen if a member passes away?

Dealing with a property owned by an SMSF can be complicated when a member passes away. For example, if a member passes away and their beneficiaries need to be paid out it may be necessary to sell the property. There can also be some complications if different members are reaching pension phase at varying intervals.

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