Australian investors’ love affair with property is an enduring one for many reasons.

Property is a tangible, long-term investment that can provide a source of income through rent.

Adding an investment property to your SMSF can seem like an attractive proposition.

Any rent earned by the property, as well as capital gain made if the property is sold, are taxed at a maximum of 15%.

In addition, if you’ve retired and commenced a pension within your fund, any rent, or capital gain on the sale of your property may be completely tax free.

Things to consider

But like any other investment, property isn’t without risk.

To get into the market you need a sizeable deposit, which can be difficult to save.

Borrowing costs are a consideration and interest rates can rise as well as fall.

In addition, lending to SMSFs must be done via a limited recourse borrowing arrangement (LRBA).

In comparison to standard investor loans, LRBAs have additional restrictions and costs and you will need to understand these, and ideally get some advice, before proceeding.

Property comes with maintenance costs and if you’re stuck with a bad tenant, or your property sits empty for months, you could lose money.

What’s more, because of its cost, investing in property can result in a portfolio that lacks diversification - potentially exposing your SMSF to risk if the property market underperforms.

Property is also a relatively illiquid investment - so if it’s part of your SMSF portfolio, it can limit the amount of cash you can access when it’s time to pay benefits from your fund.

As a result, you may be forced to sell and you could lose money.

All this doesn’t mean that SMSF owners should avoid property altogether - but you might want to consider other ways of gaining exposure to it.

Here are some options to think about:

1. Managed funds

With property managed funds, you don’t have the cost and stress of being a landlord. By pooling your resources with other investors you can gain exposure to a range of residential and commercial property in other states, territories or even overseas.

Investing in a property managed fund can be more liquid than buying the property yourself.

Colonial First State offers a range of managed funds that offer exposure to various domestic and international property types.

2. Exchange Traded Funds

Exchange Traded Funds (ETFs) can be an affordable way to gain exposure to the property market. Like managed funds, ETFs pool the money of multiple investors. However, unlike managed funds they’re passively managed - which means they track the market index that they’re replicating.

ETFs cover a range of indices, including property, and can be bought and sold on the stock market, like shares. While their management fees can be cheaper than managed funds, every time you buy or sell one, you’ll need to pay brokerage fees, which can add up over time.

You can find further information on ETF options on CommSec.

3. A-REITs

Australian Real Estate Investment Trusts (A-REITS) are a bit like managed funds, except that they are listed on the stock exchange and while you’re investing in a shared portfolio of commercial and industrial real estate, A-REITS often involve a property management function in addition to the ownership of physical property.

A-REITs are far more liquid than buying your own property because you can buy and sell units, rather than an entire property. By pooling your resources with other investors you may get an exposure to high value properties such as shopping centres and office complexes. A-REITs can also expose you to a range of regions and sectors, instantly diversifying your portfolio and reducing risk. The rents from your underlying assets may provide a stable income.

You can find further research about AREITs on CommSec.

4. Fractional property investment

Instead of buying an investment rental property, there are ways of buying a part-share of properties from which you might receive part of the rental income and also part of any capital gain if the property is sold.

Property investment platforms for retail investors can allow you access to the property market with only a small investment, but there are also fees and charges associated with the investment.

Talk to your adviser

Before investing in any type of property, make sure you talk to your adviser. They can help you decide whether it might be appropriate for your SMSF’s investment objectives. 

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Things you should know

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account.

Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Commonwealth Financial Planners are representatives of Commonwealth Financial Planning Pty Ltd ABN 65 003 900 169 AFSL 231139 a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 (the Bank).  While potential SMSF investments have been illustrated within this content they do not represent a comprehensive suite of possible investment products and services within the guidelines pursuant to the SIS Act 1993 with ATO oversight.