Managing a self-managed super fund (SMSF) gives you the flexibility to choose how to invest for your retirement, and property is one option some SMSF trustees explore. Investing in property through an SMSF isn’t a simple process. It comes with specific rules, risks, and costs that require careful planning and independent advice.
While we won’t cover the rules for buying property through an SMSF here, we will discuss how an SMSF term deposit can help you prepare for the costs of buying and managing property through your SMSF.
How an SMSF term deposit can support your property investment
When you're thinking of purchasing property with your SMSF, planning your cash flow is essential. Property transactions come with significant costs that can impact your fund's liquidity.
Here’s how SMSF term deposits might help
1. Building cash reserves for a property purchase
Term deposits can provide a low-risk way to grow your savings while waiting for the right investment opportunity. You can set the maturity date of your term deposit to coincide with your planned property investment so that your funds should be available when you need them.
In the meantime, the term deposit will earn a fixed interest rate, helping your SMSF’s cash reserves grow steadily. This can be useful for helping to cover deposits or other upfront expenses when the time is right.
You also know exactly how much interest you will earn over the life of the term deposit (provided you hold to maturity), so you can better plan for how much you have to spend on buying a property.
2. Managing loan repayments and ongoing expenses
If your SMSF takes on a loan, regular repayments and property expenses can strain your fund’s cash flow. A laddered term deposit strategy – where you have multiple term deposits maturing at different times – can help make funds available when needed, whether that be for loan repayments, maintenance, or other property-related expenses. Again, you should know the amount of interest you will earn from your term deposits (provided they are held to maturity), so you can better plan to manage your cash flow.
3. Protecting liquidity for emergencies
Owning property within your SMSF may require you to maintain enough liquidity to meet unexpected costs like urgent repairs or rental vacancies. Term deposits can act as an emergency fund, giving you access to cash when the term deposit matures.
4. Taking advantage of property market timing
Property markets fluctuate, and the right buying opportunity may not come along immediately. Placing your SMSF savings in short-term deposits (e.g., 3- or 6-month terms) can allow you to earn interest while you wait for the right time to purchase and enable you to have those funds available when you are ready to buy.
Some considerations when using SMSF term deposits for property investments
Interest rates fluctuate
Term deposit rates change with market conditions, so it can be helpful to monitor offers from different term deposit providers. Aligning the maturity dates of your deposits with your property investment timeline may make it easier to access funds when needed while also taking advantage of competitive rates.
Balancing potential returns and flexibility
Longer-term term deposits may offer higher interest rates, but your funds will be locked away for a longer period. If you’re unsure when you’ll need the money, shorter-term term deposits could provide more flexibility. It’s worth considering how to balance earning interest with having funds available for property-related expenses.
Aligning term deposits with your SMSF strategy
When using SMSF term deposits to fund property investments, remember to keep your SMSF in line with Australian regulations. Your SMSF should maintain sufficient liquidity to meet ongoing obligations, including property-related costs such as loan repayments, maintenance, and rates.
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