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Creating Your SMSF Property Investment Strategy
There’s a lot that goes into an SMSF property investment, key among them being a well-structured investment strategy.
What is an SMSF investment strategy?
When investing using an SMSF, you’re required by law to create an investment strategy. This strategy outlines your plan for your property investment and how it’s used to achieve the SMSF members’ retirement objectives and investment goals.
Take note, your strategy must be in writing and is made with your fund’s specific circumstances in mind. It should not simply be a copy or a repeat of the legislation. It needs to include how and why you’re choosing this specific path for investment, which includes plans for making, holding, and realising the asset.
Superannuation laws require trustees to prepare, implement, and regularly review the SMSF investment strategy. You must ensure that the investment strategy is properly implemented and understand that, as trustees, you are responsible for meeting all compliance requirements. Failing to meet these obligations can result in serious breaches and penalties.
What needs to be in your SMSF property investment strategy?
Creating an investment strategy can be difficult, especially for those who don’t have much investment experience. There’s no specific format that you need to follow; however, your SMSF property investment strategy must have a clear and concise explanation of your retirement goals and how to achieve them.
A comprehensive, robust, and well-structured SMSF property investment strategy must:
- Explain how the property investment meets the member’s retirement objectives, considering age, employment status, and retirement needs.
- Assess the risk tolerance of SMSF members and define the acceptable risk levels.
- Review the potential risks and likely returns from your fund’s investments, maximising member returns.
- Analyse the composition of your fund’s investments and the risks associated with diversification.
- Evaluate the ease of liquidity or how quickly the asset can be converted into cash to meet fund expenses and pay member benefits.
- Examine the insurance requirements of each of the SMSF members, including life, permanent or temporary incapacity insurance.
An SMSF property investment strategy generally includes an accurate SMSF property valuation. The goal of having a detailed investment strategy, aside from compliance, is to support decision-making and reduce risk.
You could seek the help of a licensed financial adviser for guidance on your strategy, but the management and implementation of it rely on the SMSF members. As a member or trustee of the SMSF, you’re responsible for managing the investment and making sure it complies with the Superannuation Industry (Supervision) Act 1993 and meets the best financial interests of the SMSF’s members.
The investment strategy template you use must meet superannuation rules and be tailored to your fund’s circumstances. Most importantly, your property investment strategy needs to be regularly reviewed per the super laws for the relevant financial year.
Because superannuation and property investment laws are continuously updated, you need to stay on top of them to ensure your documentation and requirements comply with super rules.
How to use your SMSF for property investment
To create an effective SMSF property investment strategy, you need to have a strong understanding of your property investment options. For SMSF property investments, you have the option to purchase residential or commercial properties. Each option offers its own set of pros and cons. It’s up to you to decide which one best suits your investment and retirement goals.
SMSF for direct property purchase
You may use your SMSF to invest in direct real estate purchases, including residential or commercial properties. You could consider using a limited recourse borrowing arrangement (LRBA) to purchase the property with a loan if your SMSF doesn’t have enough funds to buy a property outright.
SMSF for business real properties
This SMSF property investment strategy is commonly used by small and medium-sized business owners. Buying a commercial property through your super allows your business’s premises to be owned by the SMSF. The SMSF can cover the deposit and stamp duty, with the rest being borrowed through an SMSF commercial loan.
Funding your SMSF investment property purchase
If you have enough money in your super account, you could purchase a property outright. However, you generally cannot use the entirety of your SMSF funds when buying a property. In most cases, SMSF investors use a portion of their super balance as a deposit and get an SMSF loan.
Lenders such as loans.com.au have a range of finance options with competitive rates for you to choose from, whether you’re thinking of buying a residential or commercial property. For more information, get in touch with the friendly lending specialists at loans.com.au.
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek independent professional advice tailored to your circumstances before making any financial decisions.
