Adding commercial property to your SMSF portfolio

What is commercial property?

Commercial property in Australia is defined as real estate used solely for business purposes. This encompasses a broad range of property types, including retail outlets (e.g. shops, restaurants), industrial factories and warehouses, medical suites, childcare centres, and others. These properties can generate income through rental payments and capital appreciation, making them an alternative investment option for SMSFs seeking diversification and potentially higher returns. Commercial properties are favoured by some investors as they can generate higher returns than residential properties, along with having other benefits such as longer leases.

Let’s now look at the pro's and con's of this type of investment in a SMSF. 

Pro’s & Con’s of adding commercial property to your SMSF portfolio

Pro's:

• Rental Income: Commercial properties can provide higher rental yields compared to residential properties. 
• Tax Advantages: Rental income and capital gains generated within an SMSF are taxed at concessional rates, potentially maximising your returns.
• Direct Investment: Investing in commercial property through an SMSF allows you to directly control a tangible real estate asset.

Con's:

• ‍Liquidity Risk: Commercial properties can be difficult to sell quickly, which may pose challenges if your SMSF needs to access cash at short notice.
• ‍Market Fluctuations: Property values can fluctuate, potentially impacting your retirement savings.
• ‍Management Complexity: Owning and managing a commercial property requires time, effort, and expertise.

Let’s now look at who this type of investment could appeal to.

Who should consider adding commercial property to their SMSF portfolio

Adding commercial property to your SMSF portfolio is a significant decision and may not be suitable for everyone. It could be a viable option for:

• Individuals with a long-term investment horizon who are comfortable with the illiquidity of commercial property.
• Those seeking diversification beyond traditional investment asset classes like shares and bonds.
• Business owners who want to lease the property to their business on commercial terms, provided it aligns with SMSF compliance requirements.

Let’s now look at the mechanics of purchasing commercial property via a SMSF. 

How buying commercial property through your SMSF works

‍1. Ensure your SMSF is eligible

‍Before you invest in commercial property, your SMSF must meet the following requirements:

• The investment complies with your fund’s investment strategy.
• The property adheres to the sole purpose test, meaning it’s used solely to provide retirement benefits to fund members. This is to comply with Australian superannuation legislation.

2. Develop a robust investment strategy

An SMSF must have a written investment strategy that outlines:

• The fund’s investment objectives.
• The types of assets it will hold.
• Risk management strategies.

Your investment strategy should reflect the fund’s capacity to bear the risks associated with commercial property and align with members’ retirement goals.

‍3. Obtain financing

‍Key considerations for SMSF loans include:

• Lender Requirements: You need to demonstrate that your SMSF can service the loan based on the property rent income, your superannuation contributions and any other investment income. There are also typically higher deposit requirements for these loans of at least 20%.
• Loan Costs: Interest rates for SMSF loans may be higher than regular residential property loans.

‍4. Find the right property

‍Selecting the right commercial property is critical. Consider:

• Location: Properties in prime locations are more likely to retain value and attract quality tenants.
• Tenant Quality: A strong, stable tenant can provide reliable rental income.
• Lease Terms: Longer leases with regular rent reviews are generally more favourable for SMSFs.

‍5. Conduct due diligence

‍Before finalising the purchase, conduct a thorough investigation to assess the property’s:

• Market value.
• Rental yield potential.
• Legal and zoning compliance.
• Maintenance and operational costs.
• Whether it is an eligible property security for your lender.

‍6. Complete the purchase

‍Once you’ve conducted due diligence and secured financing, your SMSF can proceed with the property purchase. Be aware that all property-related transactions must be in the name of the SMSF and comply with its investment strategy.

‍7. Ongoing management

‍After purchasing the property, ongoing management is essential to ensure compliance and profitability. Tasks include:

• Collecting rent and managing tenant relationships.
• Conducting regular property maintenance.
• Ensuring compliance with SMSF and tax regulations.

How Yard can help add commercial property to your SMSF portfolio

Yard offers tailored solutions to help you finance your SMSF commercial property investment. With competitive interest rates, flexible loan terms, and expert guidance, we make the process straightforward and transparent. Features of a Yard SMSF Loan include:

• Lending up to 80% LVR based on the property value (this means you require 20% deposit). 
• Assistance with limited recourse borrowing arrangements (LRBAs).
• No annual loan reviews.
• Repayment types: principal & interest or interest only.
• Additional repayments and 100% offset facility.