Smart Ways to Buy Investment Property with SMSF Loans

Commercial property remains the viable option for Eden Hill investors wanting to use their Self-Managed Super Fund to purchase an investment asset.

The Australian Government confirmed on 23 June 2026 that new Limited Recourse Borrowing Arrangements for residential property will be banned once the bill receives royal assent, expected in mid-August. Contracts signed before that date remain unaffected, but for most Eden Hill investors exploring SMSF property loans now, the focus has shifted entirely to commercial real estate.

What Is a Limited Recourse Borrowing Arrangement

A Limited Recourse Borrowing Arrangement allows your Self-Managed Super Fund to borrow money to purchase a single asset, typically property, while limiting the lender's recourse to that asset alone. The property is held in a bare trust until the loan is repaid, at which point full ownership transfers to the SMSF. If the fund defaults, the lender can only claim the property itself, not other assets held within the fund.

The structure requires each property to sit in its own separate bare trust with its own loan. If your fund wants to purchase two commercial units, you need two separate LRBAs. This keeps each asset ring-fenced and maintains compliance with the single acquirable asset rule.

Commercial Property LRBAs Remain Available

Commercial property LRBAs are unaffected by the residential ban. Your SMSF can still borrow to purchase business real property, including retail, industrial, or office space used wholly and exclusively in a business. Specialist lenders are offering LVRs up to 80% for commercial property loans, up from the historically conservative range of 60-70%.

LVRs typically range between 65% and 75% depending on the asset class. Industrial property in areas like Malaga or Wangara often attracts higher LVRs than retail shopfronts due to perceived tenant stability and lower vacancy risk. Lenders also scrutinise post-settlement liquidity more than they did previously, often requiring a cash buffer of 5-10% of the asset value to cover unforeseen expenses and maintain the integrity of the borrowing arrangement.

SMSF Loan Deposit Requirements and Borrowing Capacity

Most SMSF lenders require a deposit of at least 20-25% for commercial property, though some specialist lenders will consider 20% where the fund demonstrates strong liquidity and rental income projections. The fund must have sufficient cash reserves on top of the deposit to cover stamp duty, legal fees, and ongoing holding costs during any vacancy period.

Consider a scenario where an SMSF trustee wants to purchase a small commercial unit in the Morley or Beechboro industrial precinct. The property is leased to an unrelated tenant on a three-year commercial lease. The fund has a balance of $280,000 and the property is being purchased for $350,000. With a 25% deposit, the fund borrows $262,500 through a SMSF loan, leaving approximately $17,500 in the fund after settlement costs. Lenders would typically require the fund to maintain at least $25,000 to $35,000 post-settlement to cover vacancies, repairs, and compliance costs, meaning this scenario would likely require additional contributions or a larger deposit.

Related Party Leases and the 5% In-House Asset Rule

SMSFs are restricted from holding more than 5% of their total assets in in-house assets, which includes property leased to a related party. If your SMSF purchases a commercial property and leases it to a business you own or control, that property is classified as an in-house asset unless specific exceptions apply.

The exception allows business real property to be leased to a related party without breaching the in-house asset rules, provided the property is used wholly and exclusively in the business. This is particularly relevant for Eden Hill business owners who operate from a commercial premises and want their SMSF to own the building. The lease must be at market rates and documented properly, and the safe harbour interest rate for related-party LRBAs in the 2025-26 financial year is 8.95%, down from 9.35% the previous year.

Sole Purpose Test and Property Modifications

The property must meet the sole purpose test, meaning it exists purely to generate retirement benefits for fund members. Personal use is not permitted. You cannot use the LRBA to fund structural improvements or anything that changes the fundamental character of the property while the loan is outstanding. Repairs and maintenance are allowed, but structural changes are not.

In a scenario where an SMSF owns a small warehouse in Malaga and the tenant requests modifications to install a mezzanine level, the fund cannot borrow additional funds under the LRBA to complete that work. The fund could use its own cash reserves to fund repairs or minor upgrades, but any structural alteration that changes the nature of the asset would breach the borrowing rules. Once the loan is fully repaid and the property is transferred out of the bare trust, the fund can then make structural changes using fund cash.

Compliance Training and Record-Keeping Requirements

New rules require all SMSF trustees, both new and existing, to complete certified training covering LRBAs, related-party transactions, cash flow planning, and compliance obligations. Non-compliance may result in penalties of up to $19,800, or even fund disqualification. SMSFs with borrowing arrangements face heightened data-matching and transaction-monitoring from the ATO, and trustees must ensure rigorous record-keeping.

This includes maintaining loan documentation, bare trust deeds, rental agreements, evidence of market-rate rent, proof of loan repayments, and annual valuations. The ATO has made it clear that SMSF trustees using LRBAs will be subject to closer scrutiny, particularly where related parties are involved.

SMSF Loan Interest Rates and Loan Structure

SMSF loan interest rates are typically higher than standard investment loans due to the limited recourse nature of the borrowing and the additional compliance burden on lenders. Variable rates are common, though some lenders offer fixed rate options for one to three years. Rates vary depending on LVR, asset type, and whether the lease is to a related party.

Your SMSF mortgage broker can compare SMSF lenders across the non-bank and specialist lending market to identify the most suitable loan structure for your fund. Because each fund's circumstances differ, including member age, contribution capacity, rental income, and liquidity, loan applications require detailed financial modelling and compliance review before submission.

Call one of our team or book an appointment at a time that works for you.

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