Can you buy a rooming house through your SMSF?

The basic rules

An SMSF can invest in residential property, including a rooming house, if the investment meets the fund’s rules:

• The sole purpose test. The fund must be run only to provide retirement benefits for its members. Buying a property so you or a relative can use it breaches that test.
• No related parties living in it. A residential property owned by the fund can’t be lived in or rented by a member or a related party.
• Arm’s length. Deals must be on commercial terms, at market value.
• Your investment strategy. The purchase must fit the fund’s written investment strategy, including diversification and liquidity.

How SMSF borrowing works

An SMSF can only borrow through a limited recourse borrowing arrangement. The loan must be used to buy a “single acquirable asset”, which is held in a separate trust until the loan is repaid, and the lender’s recourse is limited to that asset.

The ATO’s rules let borrowed money be used to buy the asset and to repair and maintain it, but not to improve it. BT’s summary of the ATO ruling SMSFR 2012/1 puts it this way: “the rules specifically allow borrowed money to be used to repair and maintain a LRBA asset but not for improvements.” Money from other sources, such as contributions or fund earnings, can be used for improvements.

Why a new build is the sticking point

A Keyspace project, like most new builds, involves buying land and then paying a builder in stages. Under the ATO’s ruling, that structure doesn’t suit an LRBA. As BT’s summary of SMSFR 2012/1 explains:

“The purchase of a house and land where borrowed money pays for instalments at various stages of completion will not meet LRBA requirements.”

BT Professional, summarising ATO ruling SMSFR 2012/1

That’s because the progress payments buy building services and materials, which aren’t a single acquirable asset. And building on land the fund already holds under an LRBA runs into a second problem: “Building the house changes the qualities and characteristics of the block of land such that the replacement asset rule is breached.”

Routes that can work

• Pay from the fund’s own money. If the fund can pay for the land and the build without borrowing, the LRBA rules don’t apply. On our current projects, the total cost is $1.13 million to $1.61 million, so this suits larger funds.
• Buy a completed rooming house. An LRBA can fund the purchase of an existing, completed property as a single acquirable asset, subject to the lender and the other rules.
• Buy a package that settles on completion. According to BT’s summary of the ruling, if the fund contracts to buy a house and land package and “settlement occurs once construction of the house is complete”, the deposit and settlement “can be funded under a single LRBA”. Whether a particular project can be structured this way depends on the seller and the builder.

Other things to weigh

• Concentration. A single property of $1.13 million or more could be most of a fund’s assets. Your investment strategy has to address that.
• Liquidity. A rooming house can’t be sold in parts. Make sure the fund can pay pensions and expenses without selling it.
• Operation. The fund still needs a licensed operator, council registration and a manager. Our rules guide covers these.
• Fewer lenders. Fewer lenders offer SMSF loans than standard loans, and fewer again lend on rooming houses.

Before you commit

• Talk to a licensed SMSF adviser and your fund’s accountant or auditor before signing anything.
• Confirm which route you’d use: fund cash, a completed property, or a package that settles on completion.
• Check that no member or related party will live in or rent the property.
• Check the purchase fits your fund’s investment strategy, including diversification and liquidity.
• If borrowing, confirm the lender will finance a rooming house through an SMSF.

Questions

Can my SMSF borrow to build a rooming house?

Not in the usual way. Under the ATO’s ruling, borrowed money can’t pay construction instalments, and building on land held under an LRBA breaches the replacement asset rule. The fund can use its own money for construction, or borrow to buy a completed property or a package that settles once construction is finished.

Can I live in the rooming house my SMSF owns?

No. A residential property owned by an SMSF can’t be lived in or rented by a member or a related party.

Can Keyspace structure a project for my SMSF?

Not every project can be. Most of our projects are bought with a separate land contract and build contract, which suits personal or company ownership. Talk to us and your SMSF adviser together, and we’ll tell you honestly whether a project can fit. Email info@keyspaceproperty.com.au.

Sources

1. Australian Taxation Office, Your obligations as an SMSF trustee
2. Australian Taxation Office, Rules for entering an LRBA
3. Australian Taxation Office, Rules on assets under an LRBA
4. Australian Taxation Office, SMSFR 2012/1: limited recourse borrowing arrangements
5. BT Professional, SMSF limited recourse borrowing arrangement rules
6. Consumer Affairs Victoria, Rooming house operators licensing scheme
7. Keyspace Property, current project list and feasibilities

Written by Keyspace Property

We find the land, arrange the build and manage purpose-built rooming houses for investors in Victoria. We’re paid by the builder, so we’re not independent. How we’re paid.

General information only, not financial, tax or legal advice. Figures from Keyspace feasibilities are projections based on the assumptions shown, not guarantees. Rules and rates are as at 26 September 2026; check them before you act, and get independent advice about your own situation.

Keep reading

• Investing in rooming houses in Victoria: how it works
• How much does it cost to build a rooming house in Melbourne?
• Rooming house investment risks: an honest guide
• Rooming house rules in Victoria: the investor’s checklist