Buying property using superannuation savings has exploded in popularity of late. So much so that it’s not only the talk amongst Aussie folks around a BBQ but it’s stirring debate amongst politicians, regulators, and social agitators all around the country.
What’s all the fuss about?
It’s unnecessary to explain that Aussie’s love their property like no other population on earth… Hence the saying, ‘The Great Australian Dream’ (a belief that home ownership can lead to a better life.)
The opportunity for financially ambitious mums and dads as well as professional investors alike to add another property to their portfolio has been snapped up enthusiastically. According to the Financial Services Council, two in every five Self-Managed Super Funds (SMSF’s) own property and 22 per cent of all SMSF’s own a residential property.
Why buy property in your super fund?
The obvious answer here is to get access to ‘The Great Aussie Dream’, but in all seriousness, having investment exposure to residential property will provide diversification from other super assets such as shares, listed property, cash, or fixed interest. Exposure to direct property offers additional diversity and the potential to ‘smooth out’ returns when other assets are not performing well.
Being able to borrow for an asset adds opportunity and the ability to multiply your gain. Plenty of Australians are already familiar with this concept through their family home wherein you will have used a combination of your money and bank loan to buy a property. While there’s additional regulation (which must be respected) the concept of using superannuation money plus a bank loan to buy an investment property is much the same.
For example, let’s look at the purchase of a $400,000 property using $100,000 cash deposit and borrowing $300,000. If in 5 years that property value has increased to $450,000, you’ve basically generated a $50,000 capital gain. Your initial $100,000 investment has grown by 50 per cent. Not bad, right? Now the actual return metric is complicated by rents, costs, taxes, etc but my point here is that borrowing has the potential to amplify your gain. But, beware, it also multiplies your losses in situations where your investing prowess isn’t as good as you thought it might be.
#3 Tax Savings
One of the most common misconceptions I come across is that superannuation is a type of investment. In fact, this couldn’t be more wrong. Superannuation is a type of tax environment. The reality is, you can buy a lot of different things with your super, it’s just not that well known. The real story however, is that super has a tax rate of 15 per cent on taxable earnings and 10 per cent on discounted taxable gains. If you’re over 60 years of age, your tax rate could be zero. Now consider, you’ve been diligently investing all your life and it’s time to slow down and perhaps retire. If you could generate income or capital gains with ZERO tax how would that compare to owning those same assets in your own name where your tax can rise to well over 40 per cent?
When buying property in your super fund might be not ideal
#1 It’s strictly business – no personal use
Does the idea of buying a beach-side shack to visit on weekends and Air BNB’ing for additional cash when you’re not around sound good? Well, unfortunately your super savings can’t help with this. Firstly, you can’t personally benefit from the property meaning you and your relatives cannot use the beach-side shack for holiday getaways. A property inside super needs to be purchased with the sole purpose of providing a better retirement for its members (that’s you). If buying a beach-side shack achieves this objective that’s well and good, you just can’t use it!
#2 Delayed Gratification
The concept of buying the perfect investment property that meets all your criteria for above average growth and low rental vacancy for your ultimate financial benefit is great and all. However, you need to be aware of timing restrictions around access to this benefit. Whilst you can buy multiple properties and sell these as you wish, the proceeds of quality investment decisions can’t be personally accessed until you meet a ‘condition of release’. The earliest conventional opportunity for this is currently when you turn 57 years of age. Having a good understanding of when you need access to your capital is a critical decision around buying property in your super.
#3 There’s a lot of rules; make sure you know them!
The term ‘Self-Managed’ suggests subtly that undertaking this strategy should be fairly easy in terms of its design and implementation. In actual fact, there are a significant list of legislative requirements that need to be adhered to when setting up and managing your own SMSF. Unless you have a deep understanding of these, it could be easy to fall foul of the law which could be quite an expensive exercise at best or criminal at worst. The concept is simple but getting the right advice to make sure you’re always adhering to the ever-changing legislation affecting this sector is critical.
Here’s my number one piece of advice for anyone excited about the possibility of buying a property with their super.
‘Property in general is not the key to success with this strategy. If you make a poor investment choice, you will get a poor outcome. Get the right advice, do the right research, and buy the right property. Quality investment selection will significantly increase the probability of a good investment outcome’
WB Financial are advisors whom tailor financial planning and advisory services that allows clients to travel the road to financial independence. Jason Cook is a non-Executive Director and Principal of WBF’s Woolloongabba office. You contact Jason on 07 3391 7199 or email here.
Superannuation is a highly specialised and heavily legislated area. It is important that people get specialist advice from a licensed superannuation professional. Propertyology is not a licensed superannuation specialist. If appropriately engaged, Propertyology can assist SMSF trustees with asset selection.