5 Common mistakes to avoid when buying property with an SMSF

5 Common mistakes to avoid when buying property with an SMSF

Many investors are drawn to the idea of buying property with an smsf (self-managed super fund) because it offers control, flexibility and the chance to build retirement wealth through tangible assets. For some, it’s about holding residential property in SMSF that can generate long-term rental income. For others, it’s about securing SMSF commercial property that their own business can lease.

The opportunity is real, but so are the risks. The Australian Taxation Office (ATO) enforces strict SMSF property rules, and one slip-up can undo the benefits of an otherwise smart investment strategy.

Here, we’ll look at five of the most common SMSF mistakes investors make, and how you can avoid them.

Mistake 1: Misunderstanding the sole purpose test

The foundation of SMSF property investment is the sole purpose test. The Australian Taxation Office (ATO) requires that every decision made by trustees must be for the sole purpose of providing retirement benefits to members.

That means you can’t:

• Live in a self-managed super fund property
• Allow relatives or friends to live in it, even if they pay rent
• Buy a holiday home and use it personally, even part-time

Even if you plan to “pay the fund back later,” the breach has already occurred. Penalties are severe: your SMSF could lose its concessional tax treatment, leaving you with a significant tax bill.

For residential property in SMSF, the rule is simple: it cannot be used by members or related parties under any circumstances.

For SMSF commercial property, there is one narrow exception: your own business can lease the property, but only if strict conditions are met. The lease must:

• Be at full market rent, supported by independent evidence
• Be paid on time and in full, like any other arm’s-length tenant
• Be properly documented with a commercial lease agreement

If these conditions aren’t met, the ATO may view the arrangement as giving you a personal benefit rather than acting in the fund’s best interests.

Mistake 2: Overlooking lending restrictions

Many investors don’t realise how restrictive an SMSF property loan can be. Unlike standard residential or investment loans, borrowing in an SMSF can only be done through a Limited Recourse Borrowing Arrangement (LRBA).

This structure has important consequences:

• The loan can only be secured against the property being purchased, not other fund assets
• If the SMSF defaults, the lender cannot go after other assets in the fund
• The property must be held in a special bare trust until the loan is repaid
• Refinancing options are much narrower than outside super

Because of these rules, SMSF property loans are less flexible and usually come with higher interest rates and stricter lending criteria. Many investors underestimate the level of scrutiny lenders apply or assume they can refinance later without issue.

If your strategy depends on regular refinancing, you may run into trouble. Before committing, stress test your assumptions with your adviser and a broker who understands the SMSF property loan market.

Mistake 3: Mixing personal and SMSF finances

Another common trap is failing to keep personal and fund finances completely separate.

Examples of this mistake include:

• Paying property expenses from your personal account instead of the SMSF account
• Collecting rent into your own bank account rather than the fund’s
• Using SMSF funds to cover unrelated personal bills

These breaches may sound minor, but they can result in your SMSF being declared non-compliant. The ATO takes segregation seriously because your fund exists solely for retirement purposes, not as a personal slush fund.

Investors sometimes make these errors unintentionally, especially when managing property-related costs. For instance, you may pay a council rate notice from your personal credit card and plan to “reimburse yourself later.” But even short-term mix-ups risk penalties.

The rule of thumb: every dollar of rent, every loan repayment and every bill must flow through the SMSF’s bank account.

Mistake 4: Overpaying or choosing the wrong property

Even if you follow the SMSF property rules perfectly, the investment still needs to be sound. One of the most damaging SMSF mistakes is paying too much or choosing the wrong type of property.

Some investors, keen to make the most of their super, rush into off-the-plan apartments or “hotspot” developments. While these may be marketed aggressively, they often deliver poor long-term results: oversupply, weak rental demand and limited capital growth.

Others focus too narrowly on owning a property within super without asking the basic question: is this a good investment?

Examples of poor choices include:

• Buying residential property in SMSF in areas with falling demand
• Selecting properties with yields too low to cover the SMSF property loan repayments
• Ignoring due diligence in favour of glossy marketing

The ATO requires all acquisitions to be made at “market value,” but market value doesn’t equal investment quality. What you really want is a property that supports your fund’s long-term goals. This is where an experienced buyer’s agent can add value, by analysing supply, demand and growth fundamentals across multiple markets.

At BFP Property Group, we understand that SMSF investors aren’t just looking for compliance; rather, they want confidence that the property makes sense within their portfolio.

Mistake 5: Neglecting professional advice

Perhaps the biggest mistake of all is trying to do it alone. Navigating SMSF property investment isn’t just about picking the right suburb; it involves tax law, superannuation law, lending structures and compliance with ATO regulations.

Professional advisers can include:

• Accountants, to manage reporting and ensure compliance
• Financial advisers, to test whether property fits your retirement strategy
• Mortgage brokers, who specialise in SMSF property loan products
• Buyer’s agents, to help you identify properties with strong fundamentals that also meet SMSF requirements

Engaging professionals isn’t about guaranteeing the “best” outcome. No adviser can promise that. But it does give you the reassurance that your decisions are informed, compliant and aligned with your long-term goals.

Frequently asked questions about SMSF property investment

Final thoughts for investors

Investing in self-managed super fund property can be rewarding, but it’s not straightforward.

The most common pitfalls include:

• Misunderstanding the sole purpose test
• Overlooking restrictions on borrowing
• Mixing personal and SMSF finances
• Overpaying or buying the wrong type of property
• Skipping professional advice

Each of these mistakes can undo the benefits of buying property with smsf, leaving investors with compliance headaches and underperforming assets.

By taking the time to understand the rules, stress testing your assumptions and leaning on professional support, you’ll give your SMSF the best chance of success.

Considering SMSF property investment? At BFP Property Group, we can help you identify suitable opportunities and navigate the complexity of the process. Book in a free consultation today.