Superannuation property

Why invest in superannuation

Superannuation or ‘super’ is money set aside by your employer over your working life for you to live on when you retire. By investing additional funds into superannuation or taking control over how these funds are invested you can influence the outcome of your retirement savings. Here are some reasons why investment in superannuation is beneficial:

  • Long Term Growth – Superannuation is a long term investment vehicle that benefits from compounding growth over time.
  • Tax Advantage – Superannuation funds are taxed concessionally, which can help retirement savings accumulate faster.
  • Diversification – Super funds offer access to diversified portfolios, reducing the risk associated with investment in a single asset.
  • Regulated Environment  – Superannuation is a regulated environment providing a level of security for investors.

Why buy property with superannuation

Buying property with superannuation has become an attractive option for many investors.

This is where Self-Managed Superannuation Funds (SMSFs) come in. It allows you to purchase a property by using some of your superannuation funds as a bank deposit, where you can use a bank loan to borrow against the property being purchased. This allows you to combine the typical benefits of superannuation with borrowing to invest in property to further grow your superannuation.

In this piece, we take a look at the pros and cons of buying property with super. By understanding these aspects, you can better assess whether investing in property using an SMSF aligns with your retirement financial planning.

Benefits of Buying Property With SMSF Loan

While several challenges exist when using super for investment property, the potential benefits can be significant. Here, we look into the advantages of this approach to building your retirement nest egg.

Tax Benefits

Tax advantages are among the most significant benefits of using an SMSF for property investment. Capital gains and rental income earned within the Self-managed super funds are taxed at a concessional rate of up to 15%, compared to the marginal tax rates that can apply outside of superannuation.

Significant tax savings can be achieved long term by using this approach. For example, Imagine you sell a house outside your SMSF and make a capital gain of $100,000. At the marginal tax rate of 47%, you would pay $47,000 in tax. However, if you sell the same piece of real estate through your SMSF, the tax payable would be capped at 15%, amounting to $15,000 – a potential tax saving of $32,000.

Potential for Capital Growth

Owning property through super gives you access to the long term capital growth. As it increases in value, the overall value of your self-managed superannuation fund grows, potentially boosting your retirement savings to a greater extent than traditional investment options within your superannuation.

Diversify Investment Assets

Building a balanced and diversified investment portfolio is crucial for managing risk. Using super for investment property diversifies you beyond traditional investment options like shares and bonds. Investing in property alongside other assets creates a more balanced portfolio, which can help reduce the impact of market ups and downs.

Drawbacks of Buying Property with Super

While the potential benefits of using super for investment property can be appealing, it’s essential to acknowledge the downsides before diving in. Gaining a better understanding of these limitations enables you to make a well-informed decision based on your unique financial situation and risk tolerance.

Limited Liquidity

Real estate is considered relatively illiquid unlike other investments like shares or bonds. This means that selling it quickly and converting it back to cash can be challenging if you encounter unforeseen circumstances requiring immediate access to funds.

While you can receive rental income from the property, accessing the principal amount before retirement might involve selling the house, which could take time and potentially lead to selling it at a loss, depending on market conditions.

Regulatory and Compliance Demands

Managing superannuation comes with significant regulatory and compliance requirements. These include:

  • Adhering to strict investment rules, the Australian Taxation Office (ATO) set out.
  • Lodging annual returns with the ATO.
  • Seeking professional advice and assistance from accountants, lawyers, and financial advisors can add additional costs.

Usage Restrictions

There are stringent rules for buying property with super. You cannot:

  • Live in the house yourself.
  • Rent it to a related party, such as a family member or friend.

These restrictions can limit your options and flexibility compared to traditional ownership.

Cost and Additional Fees

Setting up and managing superannuation involves additional costs and fees beyond the typical expenses associated with purchasing a house. These can include:

  • Establishment fees for setting up the fund.
  • Annual fees for ongoing administration and compliance.
  • Audit costs for mandatory yearly audits.

These costs can impact the overall returns you generate on your investment.

What Should You Consider When Buying Property With Super

Before deciding on using super for investment property, carefully consider the following:

Repayment Capacity

Ensure you have a solid financial plan and sufficient cash flow to comfortably manage the ongoing costs, including loan repayments, maintenance, and potential vacancies.

Find the Perfect SMSF Loan

Explore various loan options, which K Partners can guide you through. Choosing a loan structure and interest rate that works for you can impact the success of your investment.

Ask an SMSF Professional for Help

Given the complexity involved, seeking professional advice from a specialist is highly recommended.

Ready to explore the potential of using super for investment property? Get in touch with the experienced Self-Managed Superannuation Loans team at K Partners today. Our team of financial advisors will guide you by navigating the intricacies and benefits of buying property with super. Working alongside you and your unique circumstances, we can identify optimal solutions that align seamlessly with your long-term retirement aspirations.

See more about SMSF set-up costs and Benefits of SMSFs

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