The pitfalls of investing in property with an SMSF

Some of the information in this article may be out of date. We are currently in the process of updating our content to reflect FY26 details.

If you have an interest in financial matters and actively use social media, chances are you have encountered adverts and articles advocating for investing in property with your superannuation. While this approach can be a successful self-managed super fund (SMSF) strategy, it can also go terribly, terribly wrong.

At First Financial, we specialise in helping you make informed decisions regarding long-term investments, especially when your retirement is at stake.

So, let’s take a detailed look at what they are and the potential pitfalls associated with property and your SMSF.

Over the past decade, the interest in SMSFs has steadily increased as individuals seek greater autonomy and control over their financial future. However, while the expanded range of investment options, cost savings, tax benefits and increased flexibility are highly enticing, SMSFs operate in a highly regulated environment.

At First Financial, we offer an end-to-end SMSF service to ensure clients meet their compliance obligations and make informed investment decisions.

There are notable advantages to purchasing property through your SMSF, including borrowing funds through the SMSF, potential tax benefits such as exemption from capital gains tax (CGT) post-retirement and the possibility of residing in the property during your retirement years if you transfer that property out of your SMSF. However, it’s crucial to seek personalised advice to discover whether it’s the right choice for your portfolio.

Now, we’ll discuss some of the pitfalls of property investment through your SMSF.

The reality is you can incur significant costs, including stamp duty, legal fees and ongoing property maintenance and management expenses. Quite often, the interest rate on the money you borrow to buy the property in your SMSF is significantly higher than you could get when borrowing outside of an SMSF.

Property investment is also characterised as an illiquid option, meaning that accessing your funds quickly may become challenging if the need arises.

Additionally, while money is possible to fund the purchase, there are restrictions on the improvements you can make to the property whilst you still have a loan on that property. You must pay for such expenses using your existing superannuation savings. Consequently, maintaining adequate cash flow and contributions is essential.

There are multiple criteria that you must meet in order to invest in property through your self-managed super fund.

For a residential property:

• It cannot be acquired from a related party of a member of the SMSF (think you, your partner, children, family and more)
• It cannot be occupied by a fund member or any member of their respective families
• It must meet the ‘sole purpose test’.

Regulations pertaining to commercial premises are a little different. In this case, it is permissible to lease the commercial property to a fund member for their business, as long as the lease agreement aligns with the current market rate.

For more information on the rules for an SMSF, see the ATO website.

A safe investment portfolio is one that doesn’t put all your eggs in one basket.

Given the substantial funding required for a deposit, many individuals end up allocating a significant portion of their superannuation to a single property investment. However, this strategy comes with an inherent risk. Property prices are in a constant state of fluctuation and they don’t always go up. What happens if they plummet?

At First Financial, we have seen many clients experience financial losses in the property market before turning to us for help in wrapping their self-managed super funds.

When you start an SMSF and choose a property investment strategy, you’re redirecting money from a diversified account and putting it into one asset. This concentrated approach is probably the biggest pitfall of all, and it can become quite precarious very quickly.

Whether you are considering property investment or not, if you are interested in an SMSF, we can help. We have over 15 years of experience working with clients, ensuring their funds are legally compliant and that their investments are successful long term.

We want you to be able to retire stress-free, knowing you have everything you need to live the lifestyle you want.

To learn more about our SMSF or retirement planning services, contact us today.

Read more superannuation articles.