Can I Use My Super to Buy an Investment Property?

You can use your self-managed super fund to buy investment property through a specific borrowing structure called a Limited Recourse Borrowing Arrangement.

This arrangement requires the property to be held in a bare trust until the loan is repaid, with the fund making all repayments from contributions and rental income. Legal assistants working in firms that establish SMSFs will recognise the structure, but understanding it as a potential buyer changes how you assess whether it suits your position. The mechanics are precise, the restrictions are firm, and the decision requires comparing this approach against buying your first investment property through a standard loan structure.

How Limited Recourse Borrowing Arrangements Work

A Limited Recourse Borrowing Arrangement allows your SMSF to borrow money to purchase a single acquirable asset, which in this context means residential or commercial property. The property must be held in a bare trust with your fund as the beneficiary until the loan is fully repaid. If the fund defaults, the lender's recourse is limited to the asset in the trust, not the other assets within your super fund.

Consider a legal assistant earning $75,000 who has accumulated $120,000 in super by age 35. If their fund borrows $400,000 to purchase a $500,000 property, the trustee uses the $100,000 from super as the deposit plus costs. The property sits in the bare trust, rental income flows to the fund, and the trustee makes loan repayments from that income combined with ongoing contributions. The fund must pass the sole purpose test, meaning the property acquisition exists solely to provide retirement benefits, not for personal use or enjoyment before retirement.

SMSF Loan Deposit and LVR Requirements

Most lenders offering SMSF property loans require a deposit of at least 30%, meaning the maximum loan-to-value ratio sits at 70%. This differs significantly from standard residential lending where low deposit loans for lawyers can reach 90% or 95% LVR with lenders mortgage insurance.

For a $600,000 residential property, your fund needs $180,000 in cash plus settlement costs, stamp duty, and legal fees. That typically means around $200,000 in accessible super before the transaction becomes viable. Some lenders will lend at 80% LVR for residential property, but this depends on the fund's financial position, the trustees' experience, and the property type. Commercial property loans through an SMSF typically require 35% to 40% deposits, reflecting the higher risk lenders assign to commercial assets.

Interest Rates and Loan Structure Options

SMSF mortgage lenders price these loans differently to standard investment loans. Variable rates for SMSF residential loans currently sit above standard investment loan rates, often by 0.50% to 1.00%. Fixed rate options exist but tend to be limited to terms of one to five years, and the rate premium over standard fixed loans remains.

In a scenario where a legal assistant's SMSF borrows $350,000 to buy a residential property, the fund pays the SMSF variable rate on that amount. The rental income, taxed at 15% within the super environment rather than at the individual's marginal rate, services the loan. If rental income doesn't cover the full repayment, the fund must have sufficient cash flow from contributions or other income sources to meet the shortfall. The trustee cannot make repayments from personal funds outside the super structure.

Tax Treatment Inside the Super Fund

Rental income earned by your SMSF is taxed at 15%, which compares favourably to marginal tax rates for most legal assistants. If you're earning $80,000, your marginal rate sits at 32.5% plus the Medicare levy. Income taxed at 15% inside super instead of at your personal rate changes the return calculation.

Capital gains tax on property held within an SMSF also receives concessional treatment. If the fund holds the property for more than 12 months before selling, the capital gain is taxed at 10% rather than the 15% rate applied to gains on assets held for shorter periods. If the fund enters pension phase and the property is sold while supporting a pension, the capital gain may be tax-free. This outcome depends on the fund's phase and the trustees' circumstances at the time of sale.

Borrowing Capacity and Serviceability Assessment

Lenders assess SMSF borrowing capacity differently to personal loans. They evaluate the fund's ability to service the debt from rental income, contributions, and existing fund income. Your personal income and expenses don't factor into the assessment in the same way they would for a standard investment loan.

A fund receiving $15,000 in annual concessional contributions from a member earning $75,000 might generate $28,000 in rental income from the property. The lender assesses whether that combined $43,000, after the 15% tax, covers the loan repayments with a buffer. If the property requires $32,000 annually to service a $400,000 loan, the fund demonstrates sufficient serviceability. Personal living expenses don't reduce this capacity because the fund is a separate legal entity.

Comparing SMSF Loans Against Standard Investment Lending

The decision between using super or personal borrowing depends on your deposit position, income level, and timeline. Legal assistants early in their careers often have insufficient super balances to meet the 30% deposit requirement for an SMSF property loan. If your super sits at $60,000, you cannot access enough for a meaningful deposit without waiting years for contributions to accumulate.

Personal investment lending through expanding your property portfolio allows higher leverage, faster acquisition, and the ability to negatively gear losses against your personal income. SMSF lending offers tax concessions on rental income and capital gains but removes the personal tax deduction for interest and limits your leverage. The structures serve different objectives and timelines, and many legal assistants in their 30s find standard investment loans more practical given their current super balances and income levels.

Call one of our team or book an appointment at a time that works for you through our contact page to discuss whether an SMSF property loan or a standard investment structure aligns with your position and objectives.

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