As urban housing costs soar and traditional living arrangements evolve, co-living has emerged as an innovative solution, offering private spaces and a sense of community through shared areas. It is essentially a community-focused living arrangement offering flexibility, convenience & affordability. Simultaneously, SMSFs have become increasingly popular among savvy investors looking to diversify their retirement portfolios. The intersection of these two growing trends offers a lucrative investment opportunity. Today, we’ll talk about buying property through SMSF and how this can help you capitalise on the growing demand for co-living housing.
Exploring Co-Living Properties as Investments
Co-living spaces are purpose-built, community-oriented living arrangements where residents enjoy private bedrooms while sharing kitchens, dining rooms and other common areas and amenities. Unlike traditional rentals, co-living prioritises social interaction and offers all-inclusive, flexible leases. These properties often feature facilities such as co-working areas & gyms and organised social events, catering primarily to young adults & students seeking easy-on-the-pocket urban living options.
The demand for co-living is surging, particularly in major cities where housing affordability is a pressing issue. With the number of co-living homes tripling in some urban centres since 2019, this sector shows significant growth potential. Investors are taking notice, attracted by the promise of higher rental yields, reduced vacancy risk and the sector’s resilience in the face of changing urban demographics and work patterns.
Understanding SMSF Property Investment Basics
A Self-Managed Superannuation Fund or SMSF gives you complete control over investment decisions for your retirement savings. However, strict rules and regulations apply when investing or buying property through your SMSF. For instance, the property must meet the ‘sole purpose test,’ which means the property you will invest through SMSF must be solely for providing retirement benefits to you and other trustees. Also, the property cannot be acquired from a related party of a member, nor can fund members, trustees, or their relatives live in or rent the property.
Investing through an SMSF offers several benefits, including potential tax advantages, greater control over investment choices, and the ability to pool resources with up to three other SMSF members to invest in higher-value properties. But SMSF property investment comes with unique complexities and responsibilities.
Considering Co-Living Properties as SMSF Investments
Co-living homes in Australia are typically classified as commercial properties due to their business model and management structure. This classification can be advantageous for SMSF investors, as commercial properties are the common types of property that can be easily purchased under an SMSF. That means many specialist lenders may be willing to provide SMSF loans to fund your co-living investment. Also, co-living properties often offer higher rental yields than traditional residential rentals, with some reporting up to 30% higher annual rental yields.
The potential for higher returns stems from the efficient use of space and the all-inclusive nature of co-living rents. Maximise the number of tenants per property and bundle services into the rent, and you can generate more income per square meter than traditional rentals.
Moreover, investing in co-living through an SMSF can provide diversification benefits. As an emerging asset class with market drivers different from traditional residential or commercial properties, co-living can help spread risk within a property portfolio. This diversification is particularly valuable in the context of retirement planning—the core purpose of superannuation or SMSFs—where balancing risk and return is crucial.
The Pros and Cons of Investing in Co-Living Through SMSF
On paper, buying a co-living property through SMSF to diversify your SMSF’s investment portfolio and boost your retirement savings looks lucrative. But in reality, it may come with a few challenges, which you can effectively handle with the help of experts. Here’s a quick rundown of the pros & cons to help you make well-informed investment decisions.
Advantages of investing in co-living through SMSF:
- Higher rental yields, potentially 30% above traditional residential investments
- Diversification of retirement portfolio with an emerging asset class
- Positive cash flow potential, with some properties generating $20,000 to $40,000 annually
- Reduced vacancy risk due to multiple tenants
Potential drawbacks and challenges:
- Complex management requirements for shared living spaces
- Higher upfront costs for furnishings and amenities
- Potential for conflicts among tenants requiring active management
- Regulatory scrutiny due to the complexities of SMSF property investments
Key Considerations When Buying a Co-Living Property Through SMSF
Besides knowing the pros and cons of buying a co-living property through an SMSF, you should also take a careful consideration of the following factors:
Compliance requirements
It is essential to adhere strictly to the ‘sole purpose test’ to guarantee that the co-living property is exclusively used to provide retirement benefits to SMSF members. Also, you must understand the restrictions in acquiring property from related parties and comply with local zoning laws and regulations specific to co-living spaces.
Financing options
You may have to explore specialist SMSF lenders or apply for commercial property loans, as co-living properties are often classified under commercial real estate. Furthermore, serviceability assessments will likely be based on projected rental income derived from multiple tenants, which is another vital factor to consider.
Property management and tenant considerations
As a co-living investor, you need efficient systems for managing multiple tenants and shared spaces. Consider partnering with specialised co-living operators or property managers with years of experience in the niche. While co-living has a reduced vacancy risk, you must still plan for tenant turnover as lifestyles and work patterns continuously evolve, especially among young professionals, the primary target of co-living housing.
Property renovations
You can freely purchase and renovate a property through your SMSF, but it depends on how you’ve acquired the property and your intentions. If you bought the property with your SMSF outright, you can renovate and redesign your co-living housing as you wish, provided your trust deed permits it. While you can modify your trust deed, it’s advisable to have a knowledgeable SMSF conveyancer assist you.
On the other hand, if you acquired your co-living property using a limited-recourse borrowing arrangement (LRBA), you may not be permitted to renovate it if there is an outstanding mortgage. However, you may perform repairs to restore defects or damages without altering the property’s original character. Also, you can’t use borrowed funds for improvements that would boost the property’s value. Non-structural updates that don’t change the property’s essential nature, size, or layout are allowed. For instance, you could replace kitchen appliances or improve the garden, but extending the property to build more rooms might not be possible.
Risk assessment
Like with any investment, a thorough risk assessment is necessary to evaluate the market demand for co-living in your chosen location. Consideration of the potential impact of economic downturns on young professional tenants is also essential. Lastly, you must assess the property’s ability to convert to traditional housing if necessary. That can provide an important safety net for future planning.
Steps to Invest in Co-Living Property Through SMSF
If you’ve decided to buy a co-living property through your SMSF, here are the potential steps you need to take:
1. Set up or review your SMSF.
- Ensure your SMSF trust deed allows for property investment.
- Appoint a licensed SMSF auditor.
- Develop an investment strategy that includes co-living properties.
2. Perform due diligence and select the location for your co-living housing.
- Research areas with high demand for co-living spaces.
- Analyse potential rental yields and capital growth prospects.
- Assess the property’s compliance with co-living regulations.
3. Go through the financing and purchase process.
- Obtain pre-approval for an SMSF loan if required.
- Engage a conveyancer experienced in SMSF property transactions.
- Complete the purchase and set up property management systems.
Final Thoughts
Investing in co-living properties through an SMSF offers a unique opportunity to tap into an emerging market with potentially higher returns. However, it comes with complex considerations around compliance, management, and renovations. So, as with any significant investment decision, seeking professional advice is critical to handling SMSF property investment and co-living regulations.At Harmony Co-Living, we specialise in co-living investments. You can count on our expert guidance and top-notch investment strategies. Our team can help you navigate the complexities of co-living SMSF investments, from property selection to ongoing management. Contact us today to schedule a no-obligation consultation.
