Issues and tips of using an SMSF to buy property

Data from the ATO in June 2012 showed a 43% increase in the number of SMSFs during the last ten years and many of investors are inclined to put the money in residential property rather than the volatile equity market. The strategy to set up an SMSF and then investing in real estate does not work for everyone and it comes with potential traps especially when borrowing is involved. Even worse, some investors use an SMSF to buy property without seeking any financial advice because assuming themselves have as much professional knowledge as financial specialists do in running their fund.

The common compliance issues associated with running the SMSF are listed:

• Signing a property sales contract and paid a deposit without first establishing an SMSF.
• Lack of correct documentation, with loan contracts signed between the financial institution and the bare trust rather than the SMSF.
• Borrowing arrangements are breached due to the confusion between the members and trustees of SMSFs.

Some other problems arising from SMSF trustees due to lack of proper and professional advice include:

• Transferring super from another fund into an SMSF and forgoing the any attached life insurance.
•  The investment decision made without sufficient consideration on whether it is consistent with the retirement expected return and risk tolerance.
• Paying too much for the property and the subsequent costs involved in the limited recourse requirements arrangements.
• Unable to meet the financial obligation going forward if the rental property leaves empty for a significant period of time or member contributions cease to be paid into the SMSF.

Therefore, buyers are recommended to pay more attention to the points mentioned above when running their own SMSF.

What are the costs involved in starting and running an SMSF answered here?