Property inside a Self-Managed Super Fund (SMSF) continues to be a popular strategy for Australians wanting more control over their retirement assets. While the potential benefits—stable income, capital growth, and tax efficiency—are attractive, SMSF property is governed by strict rules. Failing to comply can trigger penalties, loss of tax concessions, or even the forced sale of the asset.
Before an SMSF invests in property, trustees must understand the borrowing rules, how to choose suitable property, compliance requirements around related parties, and how to maintain healthy diversification inside the fund.
This guide breaks down the essentials in plain English.
1. Borrowing Rules in Plain English (LRBA Explained)
If your SMSF does not have enough cash to purchase a property outright, it can borrow under a Limited Recourse Borrowing Arrangement (LRBA). This is one of the most technical areas of SMSF law, but here is the simple version:
What an LRBA Means
- The SMSF borrows money from a lender (bank or related party).
- The property is held in a separate holding trust until the loan is repaid.
- Only the property itself can be used as security—not other SMSF assets.
This “limited recourse” rule protects the fund from losing everything if the loan defaults.
Basic LRBA Requirements
- The loan must be used to buy a single, identifiable asset (e.g., one property).
- You cannot use borrowed funds to improve the property—only to acquire or maintain it.
- Repairs are allowed. Renovations or major upgrades are not.
- All payments (loan repayments, expenses) must come from the SMSF.
Banks Are Stricter Now
Many banks have tightened lending criteria on SMSF loans, meaning:
- Higher deposits (often 25–35%)
- Stronger cash flow requirements
- Lower loan-to-value ratios
Trustees should confirm borrowing capacity early in their planning.
2. Property Selection and Yield
Because an SMSF is ultimately a retirement vehicle, any property purchased must support the fund’s investment strategy.
Key Selection Considerations
- Yield vs. growth: A fund often needs solid rental yield to cover loan repayments.
- Vacancy risk: Extended vacancies can weaken liquidity inside the SMSF.
- Location and tenant quality: Stable industries and long-term leases strengthen retirement outcomes.
- Maintenance costs: High ongoing expenses strain the fund’s cash flow.
Residential vs. Commercial
- Residential SMSF property tends to have lower yields but broad demand.
- Commercial SMSF property often delivers higher rental returns and longer leases, making it popular for SMSFs.
If the SMSF owns business premises leased to a member’s business, the rent must be at full commercial market rates and paid on time, like any other arm’s-length tenant.
3. Avoiding Related Party Issues
SMSFs must follow strict related party and arm’s-length rules.
What You Cannot Do
Live in the property
Let family or related parties live in it
Rent it to a related entity (unless it’s business real property and rules are met)
Buy a residential property from a related party
Lease below market value or offer “mates’ rates”
These rules exist because super is meant to support retirement—not provide personal benefits before retirement.
When Related Party Transactions Are Allowed
A related party transaction may be allowed if the property qualifies as business real property (BRP), meaning it is used wholly and exclusively in a business.
Examples:
- A doctor running a clinic in the property
- A mechanic using a workshop
- A retail shop operated by the SMSF member’s business
Even then, the SMSF must show:
- A formal lease
- Market rent
- Regular rent payments
- Proper documentation
Any deviation can breach super laws and attract ATO scrutiny.
4. Keeping the Portfolio Balanced
Trustees must always think beyond the property itself. One of the biggest SMSF risks is lack of diversification, especially when a single property represents most of the fund’s value.
Why Diversification Matters
- A property-heavy SMSF may struggle to pay pensions or meet minimum cash requirements.
- Vacancies or market downturns can directly impact retirement income.
- The ATO expects trustees to justify concentration risk in the investment strategy.
How to Maintain Balance
- Retain a portion of the fund in liquid assets (shares, cash, managed funds).
- Review contributions strategy so the SMSF builds cash buffers.
- Regularly revisit the investment strategy to ensure the property still aligns with long-term objectives.
- Stress-test the fund’s liquidity if interest rates rise or rent drops.
A property-focused SMSF can still be compliant—provided trustees document how risks are managed.
Final Thoughts
SMSF property can be an effective retirement wealth strategy, offering stable income, potential capital growth, and long-term tax advantages. But the rules are strict, the compliance workload is heavy, and borrowing adds financial risk.
Before moving forward, trustees should:
- Update the SMSF investment strategy
- Assess borrowing capacity
- Understand related party restrictions
- Stress-test cash flow
- Seek specialist SMSF advice