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5 ways you can invest in property without borrowing in SMSFs

So you already have an SMSF, and now you’d like to invest in some property. Unfortunately, while you have some spare cash to invest, you don’t have enough to buy a property outright. And borrowing really isn’t an option. So there’s nothing you can really do except to keep saving and hope for the best, right? Wrong. Just because you can’t afford a property outright doesn’t mean you can’t start investing in the property market. Here are five ways you can get your foot in the door.

  1. Related Unit Trust

A related unit trust involves pooling your resources both inside and outside of super and creating a trust. You and your SMSF then receive “units” in the trust proportional to your contribution. The trust prepares annual financial statements and income tax returns, and distributes any net income from the rental property to the unit holders in direct proportion to the number of units they hold. The beauty of the related unit trust is your SMSF can buy units from you over time, and eventually own the property outright. Note: Due to the SMSF’s involvement in the unit trust, the ATO has rules and regulations that restrict the unit trust’s activities. So you should get professional advice both during the initial setup and throughout the life of the trust.

  1. Managed Funds

Managed funds are a popular option, with a single investment providing a diverse range of asset classes and geographical regions. And by investing with more than one fund manager you can diversify even more. Investing in a Property Managed Fund can give you a diverse property portfolio of residential, office, commercial, industrial and shopping centre assets. Your portfolio may even include infrastructure assets such as roads, ports and airports across a wide geographical area. Note: Managed Funds tend not to be listed or traded on securities exchanges such as the Australian Securities Exchange (ASX).

  1. Listed Property Trust

Another way to invest in residential, office, commercial, industrial and shopping centre assets (as well as infrastructure assets) is to buy securities directly on the ASX using your broking account. Of course, if you’d prefer a more “managed fund” feel, you can get a single Exchange Traded Fund (ETF) on the ASX. Listed property trusts and ETFs are sometimes considered more popular than managed funds because:

  • their securities exchange listings provide real-time pricing (fund managers typically report unit prices the following day)
  • entry costs are cheaper with online broking accounts
  • management expenses are generally lower
  • all your investment reporting is in one place (if you use your broking account).
  1. Property Syndicates

Property syndicates are usually offered by developers, accounting firms and financial planning groups. The idea is for their clients to fund a development project (usually a commercial or retail space) and then take long-term ownership interest once it’s complete. A unit trust structure is typically set up, with each investor’s ownership being proportional to their contribution. Not surprisingly, this pooling of investor resources gives these syndicates a “managed fund” feel. In most cases, units can’t be redeemed for a number of years. However, you may be able to transfer your units to another entity you own (or an unrelated party if you can find a buyer). And in the early years there’s hardly any cash distribution, as any spare cash flow is used to pay off the bank debt. So to invest in a property syndicate you need to take a long-term view—seven to ten years at least. A lot of commercial property syndicators also market directly to high net worth investors and self-managed superannuation funds.

  1. Fractional Ownership

Fractional ownership is a relatively new (and quite interesting) investment structure. Owners and developers make their residential and commercial properties available on a platform, allowing SMSFs and other investors to buy and sell fractional interests in these properties. This means that instead of buying a single property asset in one location, an investor can take a fractional interest in a number of different property types in various geographical locations. It can also provide the liquidity to make pension payments that a single asset fund doesn’t provide—perfect for SMSFs in the pension phase As you can see, it’s now possible to invest in property even when you don’t have the funds for an outright purchase. So if you’d like to take that step, or would like to know more about investment structures and alternatives for yourself or your SMSF, don’t hesitate to get in touch with us. Because we’d love to help you achieve your goal.

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