Can you use a SMSF to buy commercial property?

If you have your own Self-Managed Super Fund, you may be looking for ways you can diversify your investments with it so that you have more money available to you upon retirement, or for named beneficiaries. One potentially great way to do that is to use your SMSF to purchase a commercial property.

However, there is often a bit of confusion about whether this is even possible. Some may think that it's not permissible to purchase any properties with an SMSF, but that's not actually the case. While you cannot purchase a residential property for yourself or someone else with an SMSF, you are allowed to purchase a commercial property and rent it to yourself or someone you know (such as a relative) for business purposes.

So if it's a question of "if" you can use your SMSF to make such a purchase, the answer is a relatively straightforward one. But if it's a question of "whether" you should do so, there are some pluses and minuses to making such a decision, and you need to know what they are to determine whether this is the right investment for you.

Know what you're getting into

Currently, most commercial properties purchased with an SMSF follow the above plan: Rent it back to yourself. Not only will you be able to set your own rent – and thus cut out the middle man of a landlord who is attempting to profit from your need to have a space out of which you run your business. However, you will be required to pay more or less the going rate per square foot for your business; you will not be allowed to charge yourself next to nothing, or overcharge your business as a means of boosting your SMSF. You will also be required to pay that rent, without fail, every month.

When you're thinking about taking this step, you should also keep in mind that there are plenty of upfront costs associated with such a purchase that you will need to be prepared for. Even beyond those you might expect when making any property purchase (loan application or closing fees, real estate sales costs, etc.) you may also need to renovate the commercial space so that it suits the purpose of your business.

All these things must be considered as you crunch the numbers and make all appropriate determinations for whether this kind of a transaction is right for you and your SMSF.

Understanding the benefits

Along with those potential hurdles and other considerations, you will obviously also need to weigh the short- and long-term benefits. These include a favorable tax situation (rental income is taxed at a relatively low rate of 15%). Moreover, even if you may have been considering a residential property initially, you should understand that their commercial counterparts tend to provide a higher annual return on your investment, sometimes more than three times as much as you would have seen for residential properties.

It's small wonder that this kind of investment is gaining significant steam among SMSFs. If you do it right, will be able to grow your funds along with the viability of a business you or someone else owns simultaneously – a classic win-win scenario. As a general rule, it's a good idea to speak with a financial expert who can help you navigate these decisions and find the kind of commercial property that is going to be a big long-term benefit and key cog in improving your SMSF for years or more to come.