A great question! We’ve sought out the expertise of a financial advisor to give you all an overview of how you can potentially use your super to invest in rental property. Through a self managed super fund (SMSF) it’s a real possibility for many Australians looking to invest in property, whether it’s your first, or you're adding to your portfolio. We sat down with Paul Zobonos from Manifest Financial Wealth to talk us through it.
Q: Can I use superannuation to buy property?
A: You can indeed use your superannuation to purchase an investment property, whether it be a residential or commercial property. In order to do so, the first thing that you will need is to set up a Self Managed Super Fund (SMSF) which is the only option that will allow you to use your superannuation to purchase an investment property. There are other types of super funds out there, such as industry funds, retail super funds and corporate super funds, however none of these allow you to purchase an investment property so let's not worry about those. With a SMSF you are able to invest from a wider range of investments than other super funds, however, there are very strict rules around investing in properties. For instance, your SMSF cannot be used to purchase a residential investment property from yourself, for any other member of the fund or a relative. Also, the property has to be rented out at market rent and fund members or their relatives are not allowed to rent out the property.
“What’s market rent?” We hear you ask. Market rent is the rent amount a willing landlord might reasonably expect to receive, and a willing tenant might reasonably expect to pay for a tenancy. It needs to be similar to the rent charged for similar properties in similar areas. Charge significantly above this amount and potential tenants can appeal to the tenancy tribunal asking for the rent to be reduced… Yikes!
How to use superannuation to buy an investment property
Q: Do I have enough funds in my account to sustain a self managed super fund?
A: To set up a SMSF, you need to ensure that you have enough funds available to make it a cost effective option when used to purchase an investment property. There are ongoing costs associated with managing your own superannuation (kindly outlined for us by the ATO here) so you need to take these into account when doing your initial research. Whilst there is no legislated minimum balance required to set up a SMSF, you should take the time to compare the level of fees you are paying on your current super to the ongoing cost associated with operating the SMSF. The general consensus is that the bare minimum fund balance you would need is around $200,000, this allows for enough to cover the costs of not only the property but also any costs associated with SMSF as outlined by the ATO above. This increases to $500,000 if you plan on using a SMSF administration company to help with the administration and compliance tasks, as their fees will be higher.
Q: Are there any benefits of my current super fund which I may not be aware of that I need to take into consideration, too?
A: Yes, many super funds have insurance benefits attached to them, such as life insurance cover, total and permanent disability cover, and income protection cover. So before taking the leap to a SMSF, you will need to factor these insurances in to ongoing costs and source them independently so you’re still adequately covered.
Q: Ok, what’s the next step?
A: Once the SMSF is setup, the members of the fund will need to rollover savings which are currently in their existing super fund/s across to the SMSF. If you’re happy with your superannuation fund amount, you are then free to purchase an investment property in full.
Q: Can I use my SMSF as a deposit and borrow the rest?
A: Yes you can, but it’s not as straightforward as an outright purchase, and there are some rules you will need to follow when using your SMSF to borrow from a lender, so it won’t be an option for everyone.
There are some differences when an SMSF borrows funds to purchase an investment property compared to an individual who is borrowing funds to purchase a property. The amount that a lending institution will lend you, is generally less than it is for an individual buyer. It’s usually around 60% to 70% of the total property price. Furthermore, the interest rate on the loan to a SMSF may be higher than it would be for an individual, and there are one-off costs involved in setting up a Bare Trust (a key element in this borrowing arrangement).
A SMSF must have trustees, either individual or corporate trustees, and can have up to 4 members. Each trustee must also be a member. As a trustee of a SMSF, you control the SMSF and all the investment decisions it makes. Therefore the trustees are legally responsible for ensuring that all compliance requirements are met, such as compiling financial accounts, lodging an annual tax return and getting the fund audited. So you need to be a confident and knowledgeable investor and you need to be sure that the SMSF will perform at least as well as other super funds, after running costs are also taken into consideration.
The ATO has published a document to help potential SMSF trustees understand their obligations in running an SMSF.
Q: Why is property investment using super beneficial over investing it in shares or not investing it at all?
A: Investing your super in property investment allows you to use gearing/debt to invest in an investment that you would otherwise not be able to invest in. Gearing provides the potential to accelerate your wealth creation in the long term. The main disadvantage with investing your super in property - compared to investing in shares - is that by investing in one property you run the risk of putting all your eggs in the one basket as such, and therefore the risk of not achieving your desired investment return, is higher.
Using a SMSF to purchase an investment property is not a set and forget investment strategy. It is quite a complex area and we would strongly recommend that people seek the services of a financial planner to help determine whether buying a property using their super is a suitable strategy for people’s individual circumstances. If you’re looking to find out more, ASICs ‘MoneySmart’ website has a wealth (pun intended!) of knowledge on the subject, along with any rules or laws you will need to follow when choosing to use your SMSF to purchase an investment property.