Property is a lumpy, Illiquid asset

Unlike shares, which can be sold in parcels within days, property is difficult to sell in part and can take months to sell in full. If a fund needs cash and its main asset is a property, it cannot sell a portion of the building. This illiquidity is the root of most property cash-flow challenges in SMSFs.

It also concentrates risk. A fund dominated by one property is exposed to that single asset's fortunes, which trustees are expected to acknowledge in the fund's Investment strategy.

The bills still arrive

A property generates ongoing costs: council rates, insurance, maintenance and repairs, and often property management fees. The fund also has its own running costs, including the annual audit and the 259 AUD supervisory levy. These must be paid in cash, on time, regardless of whether the property is producing enough income.

Rent helps, but rent is not guaranteed. A vacancy, a tenant who stops paying, or an unexpected repair can turn a comfortable position into a shortfall.

Pensions and minimum drawdowns

Cash flow becomes more important once members retire and the fund starts paying a pension. Account-based pensions require a minimum amount to be paid to the member each year, in cash. A fund whose Wealth is locked up in property may struggle to fund the required drawdown.

If the fund cannot make the minimum pension payment, the pension may Fail to qualify for its tax concessions.

Liquidity as part of the strategy

Superannuation regulations require trustees to consider the fund's Liquidity and its ability to pay its liabilities when formulating the investment strategy. For a property-heavy fund, this addresses where the cash will come from to meet expenses, pensions and any Loan repayments.

A strategy that holds some Assets in cash or other liquid investments alongside the property, and that spells out how obligations will be met, demonstrates that the trustees have addressed the issue.

Borrowing and its effect on cash flow

Where a fund has borrowed to buy property under a limited recourse borrowing arrangement, the loan repayments add a fixed, non-negotiable call on cash. If rent falls short, the trustees must find the difference from other fund assets or contributions, within the contribution caps.

Consider a hypothetical example. A fund holds a single rental property bought with a loan. The tenant leaves, the property sits empty for three months, and a major repair is needed. Rates, insurance, the loan repayment and the audit fee all still fall due.