Avoid These Mistakes Made by SMSF Property Investors at All Costs

If you’re using your Self-Managed Super Fund (SMSF) to invest in property, this episode could save you from expensive mistakes that can derail your retirement goals.

In Episode 7 of The Property Punch Podcast, father-son duo Washington and Thabo unpack the most common pitfalls SMSF property investors are STILL making in 2025. You’ll discover:

• The rookie error that can cost you your SMSF compliance
• Why rushing into the “perfect” property can backfire
• How to align your investment choice with your retirement strategy
• Insider tips to protect your returns and sleep better at night

Whether you’re just starting your SMSF journey or already have property in your fund, this episode is an awesome wake-up call to invest smarter in SMSF.

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Read the full breakdown of this episode:
https://www.yourwealthmentor.com.au/smsf-property-mistakes-podcast/

Learn more about SMSF property investment:
https://www.yourwealthmentor.com.au/smsf-property-investment/

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 ⚠️ DISCLAIMER: The content provided on this podcast is intended for general informational purposes. Please be aware that this information is not personalised to your specific investment objectives or financial circumstances. Consequently, it should not be considered financial, investment, legal, or any other form of professional advice, either expressed or implied.

Transcript

SPEAKER_01 0:00

Self-managed superfunds or SMSFs are just like Formula One cars. Incredible performance if you know how to drive them. But if you take a corner too quick or you just don't run them properly, then they can overturn or even burn you. The number one mistake that most people make is to forget the reason why they have opened the SMSF in the first place. SMSF is a vehicle for investing for your retirement, not a vehicle for personal spending account. Every decision that you're making in your SMSF has to be to provide retirement benefits for its members in retirement. Step aside of that, you are breaking the law. It's very, very important to make sure that every super fund has got some insurance or at least a consideration of insurance. People mixing their personal money with super announcement money. That's a no-no. Even if it's only for a short time, that's not allowed, you can't do that. And some auditors will have to report that instant. The ATO doesn't accept that that was an accident is an excuse. The ATO could remove your estimate stuff on the compliance list. Think of running your estimate stuff, running your own business. You need to prove every transaction. And that is legitimate. If it's not on paper, then as far as the order is concerned, it didn't happen. You're not buying your dream home. You are buying your retirement income stream. So numbers first and emotions last. This is about the retirement. You can't afford to gamble with it.

SPEAKER_00 1:25

Welcome back to the Property Punch Podcast where we talk property, wealth, and mindset. Today we're talking about something that's often misunderstood but incredibly powerful when done right. Self-managed super funds or SMSFs. We're focusing on the common mistakes people make both in running an SMSF generally and when using one to invest in property. And to help us unpack it all, we've got my co-host, property mentor, and my dad, Washington Bazanbani.

SPEAKER_01 1:58

Thank you, Tabo. Thank you for having me. Great to be here. This is such an important topic. Because self-money superfunds or SMSFs are just like Formula One cars. Incredible performance if you know how to drive them. But if you take your corner too quick or you just don't run them properly, then they can overturn or even burn you. How's your week been? It's been good. It's been great, busy with work, but today's Friday. So, you know, Fridays is how Fridays are. Looking forward to the weekend. We've got a soccer game tomorrow, semi-final.

SPEAKER_00 2:41

Really?

SPEAKER_01 2:42

One o'clock in the afternoon. Looking forward to that. Hopefully we'll win and be in the final.

SPEAKER_00 2:46

Hopefully. And it's been a big week for finance interested people because I saw in the news, like I think most people did, that the interest rates dropped. Yes. Something to something.

SPEAKER_01 3:01

So interest rates, the Reserve Bank of Australia dropped interest rates from 3.85 to 3.6%. And this is the lowest that there have been in about 18 to 24 months.

SPEAKER_00 3:14

Really?

SPEAKER_01 3:14

And it's really, really good for moms and dads, for home buyers, whether they're investors or first-time buyers.

SPEAKER_00 3:22

Is the interest rates dropping good for everybody? Or is it good for just those groups of people you just mentioned?

SPEAKER_01 3:29

Pretty much the group that is smiling the most are the ones that I've just mentioned. So people that are trying to get onto the property market, into the property market, or people that are expanding their property portfolio because they are borrowing money. So the cost of borrowing is now lower, so they'll be happy. However, the group that might be not so happy, that might be whinging a little bit, are people that are probably a little bit older in like the retirees because they obviously have some investments. They've invested their money in terms deposits in cash, and a drop of interest rates will mean that they're no longer getting as high income because now interest rates have gone down.

SPEAKER_00 4:10

And is that 0.2% difference? 0.25%. 0.25%, yes. Big difference. Because to me, who hasn't really dabbled yet or really sat down to really learn about what interest rates are and how they impact me. 0.25 doesn't sound like a very big amount for it to drop.

SPEAKER_01 4:31

It's quite significant. It's quite it can be quite a sizable amount, particularly, you know, for as I mentioned, for the people that are trying to get into the property market. Because what that might mean, it might be meaning that affording a property for the first time due to the drop. Or it may mean that be able to buy your second investment property if uh due to that drop. So it's quite significant. But for those that already got a home loan, then that 0.25% uh decrease could mean that it's freeing up a little bit of that you know squeeze in the cost of living so they can now afford to be able to you know buy a little bit more things that they will not be able to afford before before the drop. So in the property market space, what does the drop mean? So generally, what happens is when there's a drop of interest rates, the property market is like any other market. They are forces of demand and supply, economics 101. So if there is a drop of interest rates, like what has just happened, then there is an upward pressure on the demand because those people that couldn't afford to buy or that were marginally couldn't qualify to get a loan, now they can. And those are all uh buyers that are trying coming in to demand property, uh be it first-time buyers or investors. And when that happens, then that puts an upward pressure on the property prices. So what we're going to be seeing probably nationwide is going to be an upward movement of prices. So, in other words, property prices are going to go up. So, you know, if you are thinking that you're gonna wait for another three months or six months or even a year before getting into the property market, my recommendation and what I'm doing personally is get into the property as quick as possible. If you're ready, if you can afford it, if you've got a if you can qualify, if you've got an existing loan or pre-approval, just get in there and buy a good asset because uh as interest rates are going down, then definitely the property market is gonna move upwards.

SPEAKER_00 6:47

Well, let's start at the beginning. What's the first big mistake people make when starting an SMSF?

SPEAKER_01 6:55

The number one mistake that most people make is to forget the reason why they have opened the SMSF in the first place. SMSF is a vehicle for investing for your retirement, not a vehicle for personal spending account. I once came across someone who was thinking of opening an SMSF so that they can buy a personal board that they can write because they thought they're buying an asset. That's against the rules. You cannot open an SMSF to buy any personal assets. SMSF is for the sole purpose of funding for your retirement income. The ATO is quite clear on that. Every decision that you're making in your SMSF has to be to provide retirement benefits for its members in retirement. And there is no any negotiation about that. Step aside from that, you are breaking the law. What about the structure of the fund?

SPEAKER_00 7:46

I've heard that can cause a few issues.

SPEAKER_01 7:49

Absolutely. The structure you choose is very important in the beginning. Generally, there are two types of structures. There is what we call the corporate trustee structure, where you open a company to be your trustee of the SMSF or of the self-managed superfund. And the other one is the individual trustee, where you can choose yourselves as individuals to be trustees of the fund. This structure generally of the individual trustee, it's a risky structure because if there's any debt, unavailability or disability of that individual trustee, then that whole SMSF has to be worn down. And sometimes those assets have to be sold as well. The other one that I've just mentioned, the corporate trustee, it provides you with the flexibility of having to change whoever comes in as a director of that trustee without changing the trust itself. So most people make a mistake of probably having their SMSF as an individual trustee instead of a more stable corporate trustee structure. And then there's an issue about where you bring into the fund itself. I've had situations where you know siblings come in to open an SMSF, and then there can be some disputes, and sometimes, due to those disputes, everything can stay in limbo. I've had a case where brothers made a disagreement on where to invest their money, and the money was in a bank account for two years without them making a decision on where to invest because of that simple disagreement.

SPEAKER_00 9:15

And then there's the investment strategy. I've had people just use general templates.

SPEAKER_01 9:21

That's a huge one. The ATO requires every SMSF fund to have an investment strategy. And that investment strategy should clearly outline what investment returns you're expecting from your SMSF, what risk appetite you have, your diversification approach, your liquidity, which is an amount of money that has to be available in your SMSF. If you just download a template or a PDF and thin that that's a one-size-fits-all, that's not gonna work because it's not tailored to your specific needs. And that will be in breach of the SMSF laws. Your investment strategy should evolve. For example, if you've got two members and one is approaching retirement and the other one is in their early 20s, then the investment mix should actually indicate that mix.

SPEAKER_00 10:04

And what about the size of the fund? Is there a minimum amount before it's worth it?

SPEAKER_01 10:10

Absolutely. So, in generic terms, there's no uh law that stipulates the minimum balance to open a soft money super fund. However, for it to make commercial sense, you will need approximately a combined balance of around 200,000 due to the SMSF setup costs as well as ongoing cost to run it. The average cost of running an SMSF on an ongoing basis is around the$3,000 to$5,000 per annum. So if you've got a lower balance, then all your superannuation account is going to be wiped away by those fees. So it's always advisable to have a sizable balance so that you can absorb those costs. I've had a situation where you know a client is trying to or someone is trying to open an SMSF with only$80,000. So as you can imagine, by the time that you pay the upfront cost to set it up, as well as ongoing costs, then all the returns are gonna be wiped out and in no time you're not gonna have any superannuation at all.

SPEAKER_00 11:07

Are there any other mistakes that you often hear that people overlook during sell-up?

SPEAKER_01 11:12

Definitely. So the common mistake is insurance. So every super fund is expected to offer insurance for its members to make sure that they are adequately covered in the event of death, total and permanent disability, or even a loss of income. So some of these SMSFs that people commence, they lack a provision for insurance. And more so, when you've got an existing fund and you roll over your amount to your SMSF, most people, when they roll the full balance, they lose the insurance in the existing fund. And some people they that happens without them having knowledge that that has happened. So it's very, very important to make sure that every super fund has got some insurance or at least a consideration of insurance because as far as uh HO is concerned, it looks into those um those things like that.

SPEAKER_00 12:14

So we just went over the major and most common mistakes people make during the setup of an SMSF. But how about some of the ongoing management mistakes that you often see? Let's say that they've set up their fund correctly. What are the biggest ongoing mistakes?

SPEAKER_01 12:32

One of the most common ones is whereby you see people mixing their personal money with super notion money. That's a no-no. If you've got an SMSF, you need to keep SMSF business completely separate to your personal business. So, in other words, you cannot mix any transactions. I've had situations where people have come and say, Oh, I paid my personal cancer rates for my house using super anone. Even if it's only for a short time, that's not allowed, you can't do that. And some auditors will have to report that instance with the ATO when they're auditing the books. The ATO doesn't accept that that was an accident as an excuse.

SPEAKER_00 13:11

They're a bit harsh.

SPEAKER_01 13:12

Pretty much they are. They're trying to make sure that you're doing the right thing.

SPEAKER_00 13:15

And what about deadlines? Are they really that strict?

SPEAKER_01 13:19

Very much so. So you need to lodge your tax returns of your SMSF annually and on time. And if you fail to do that, the ATO could remove your SMSF uh on the compliance list, which means that your SMSF becomes uncompliant and you can actually pay quite a higher amount of uh tax if it's on a uh if it's regarded as non-compliant. And the ATO watches closely the repeat offenders. It's like being on the annoying list. What about valuation? How important is that? It is very essential. So the ATO expects that the valuations of the investments in SMSF are done at market value and on a regular basis. Some members of the SMSF try to undervalue their assets so that they can get away with you know uh lower values, I mean lower taxes that they pay. So the ATO is quite strict on having to have members to value their assets correctly and on a regular basis as well. So it's always recommended to always use a professional valuer to value their assets on a regular basis, as the valuation of your SMSF is quite a significant part of running it.

SPEAKER_00 14:29

I've heard record keeping is a big deal too.

SPEAKER_01 14:32

Yes, this is a big one. And this is where most SMSF trustees get lazy. Every decision needs to be documented. For example, investment decisions, property leases, all of it needs to be documented. Think of running your SMSF as you're running your own business. You need to prove every transaction, and that is legitimate. If it's not on paper, then as far as the order is concerned, it didn't happen.

SPEAKER_00 14:55

Do you have anything else for the ongoing category?

SPEAKER_01 14:58

I've got two more. The first one is ignoring diversification. So, in other words, putting all your eggs in one basket. Some funds are 100% into property and they ignore other investment uh classes to invest in. That's fine if your investment strategy entails that you need to invest that way and it's in line with that. But if you can't justify it, you are in breach. Secondly, it's not updating your trust deed. Laws change. And if your deed is, for example, over 15 years, you may not be able to do certain investments that are now legal today.

SPEAKER_00 15:38

So that's it for the common mistakes you've often seen or heard of or encountered during the setting up and ongoing phases of SMSF. But how about we go into SMSF property mistakes and look at some mistakes you often hear clients doing or other people doing before buying their property? What are the traps before someone even buys?

SPEAKER_01 16:04

The first big one is when people buy property in SMSF, but the SMSF is not opened yet. So what they do is they end up buying in their personal name, hoping that they're gonna change that name later on in their personal name. This has got a danger of having potentially to pay double stem duty. And sometimes, in some instances, they may end up losing their deposit. If you're buying in an SMSF and you're borrowing money to do so, first of all, you need to set up the SMSF and also set up what we call the bear trust, that's done properly, and then you can go ahead to purchase your property after that. And how about the borrowing rules? If you're borrowing to buy property, the SMSF property must be bought in what we call a bear trust, which is a separate holding trust until the loan is paid off. Miss this step, and you are in breach. And you can't fix it later. Because the ATO doesn't allow retrospective changes to this. How about finance? SMSF loans are not like any normal loans. They take longer, they are more difficult to be approved, and they have to be set it up in a special way. They also require a larger deposit. Normally 20 to 30% is a minimum. Without a pre-approval, your property might not settle. I had a situation where a client thought that it was going to be easy for them to get a pre-approval, they failed to get finance on time, and they ended up losing their deposit. Liquidity. Why is this important? This one is very important. That's one that a lot of people miss. So they have all their SMSF money tied up in property. They forget to remember that sometimes there can be no tenants or requires maintenance to that property or interest rates going up. Some issues as well, some cases as well is where you need uh that liquidity to pay off taxes for your SMSF or even uh day-to-day running of the SMSF, for example, you know, insurances and pensions depending on what phase it is. So if there's no enough liquidity in there and you're supposed to pay out a pension for a member, some situations it may mean that you might have to sell assets of the super fund to fund for that.

SPEAKER_00 18:08

And this is a big one, and one that people often get caught in. How about the emotional trap?

SPEAKER_01 18:13

As you know, most people would like to buy near where they live instead of where the returns make sense. You're not buying your dream home, you are buying your retirement income stream. So numbers first and emotions last.

SPEAKER_00 18:36

So that's the before buying stage. But let's say we bought the home now. What are some mistakes you see during that SMSF process? What mistakes do people often make?

SPEAKER_01 18:48

The most common one that we see is renovations. So in when you have borrowed money in SMSF, you're allowed to make some minor renovations, like painting, changing carpet, putting new carpets in the kitchen. However, you're not allowed to make a huge improvement. For example, converting a two-bedroom house into a three-bedroom house with borrowed money. And we have seen time and again a lot of clients, a lot of people making a mistake doing it exactly the opposite. And the ATO is quite strict on this.

SPEAKER_00 19:17

Well, then how can they improve the property if they would like to?

SPEAKER_01 19:20

You can only improve the property if you're not using borrowed money to do that. So, in other words, your SMSF has to accumulate enough money to make those developments or those changes. How about the tenants? A residential property in SMSF cannot be rented to you and your relatives or anybody that you're related to. Exception to the rule is if it's a commercial property. And if you know if it's a commercial property and you can your business can rent from that, then that lease has to be renting at market rates and also having a lease agreement in place as well.

SPEAKER_00 19:52

And what about over-leveraging?

SPEAKER_01 19:54

The most common one is where people overborrow. They get excited that they can only put 20 to 30%, and normally forgetting that you know this property is too expensive, and sometimes when you don't have tenants, money coming in, or even having to lose a job for a year or two because you've been depending on your contributions. We have seen a lot of people getting into trouble where they have to sell the property because they can't afford to hold it anymore due to the fact that they've overborrowed.

SPEAKER_00 20:21

Are there any mistakes you've seen regarding rent and valuations?

SPEAKER_01 20:25

So the rent must be at market rates, regardless of who's renting that property. We have seen rental from related parties, for example, commercial property, your business paying less rent than what it's supposed to be. So, not a good idea to do that, and that's in a breach. And for valuations, they have to be done regularly and making sure that they're being done by a professional value as well.

SPEAKER_00 20:59

Let's say a client or a person has successfully bypassed all of those last mistakes and now it's time for them to exit. What are some mistakes you've seen when it's time to sell?

SPEAKER_01 21:10

Timing is everything. If you have to sell, or if you're selling during the accumulation phase where you're building up your super, you can pay capital against tax of up to 15%. However, the magic is if you sell during the pension phase, then you can potentially pay zero capital gains tax. So most people they understand that sometimes you can potentially save tens of thousands of dollars in capital gains tax if you sell at the right time, depending on what is triggering that sale. But obviously, selling during the pension phase or the retirement phase is a better option if you want to save on tax. And what about succession planning? If a member dies or leaves the fund, you need a strong succession plan in place for that property. Without one, surviving members might be forced to sell. That can be devastating, particularly if the property is performing well and the cash is in there to pay off the departing member's share.

SPEAKER_00 22:16

We've just covered a lot. From SMSF basics to property-specific rules. What's your final advice?

SPEAKER_01 22:26

Treat your SMSF like a serious business. Know the rules, document everything, and get advice before acting. And remember, this is about retirement. You can't afford to gamble with it.

SPEAKER_00 22:38

Brilliant. Thanks, Dad. And thanks to our listeners. If you found this valuable or insightful in any way, please subscribe, like, and share this video with anyone who is considering SMSF. That's it for today's pour of the Poppy Punch podcast. Don't forget to follow, rate and share, sip smart, invest better.