Want to use your super to buy an investment property?
Then you need to explore self-managed super funds (SMSF), which give you the flexibility to choose and manage investments yourself. This includes purchasing and refinancing an investment property through your SMSF.
While this approach can unlock benefits, it's crucial to understand the pros and cons - so you can make an informed decision.
Let’s start with the pros.
There are several reasons why you may consider using an SMSF to purchase an investment property. Here's a closer look at some of the key advantages:
Tax Advantages: One of the primary benefits lies in the attractive tax framework surrounding SMSF property ownership. Unlike personal property investments, rental income earned through an SMSF is taxed at a concessional rate of 15% (compared to potentially higher marginal tax rates). This tax benefit can improve the overall return on investment. Additionally, capital gains tax on any future sale of the property may also be discounted due to the fund's tax status.
Investment Leverage: SMSFs offer the ability to leverage debt to finance a property purchase. This means investors can use a dedicated SMSF home loan to cover a portion of the purchase price, while the remaining amount is funded by the SMSF's existing capital. This strategy allows for a greater investment in the property market without requiring a larger upfront investment. It's important to note, however, that leveraging debt comes with its own set of risks as the SMSF needs to be able to cover the required cashflow to service the loan.
Diversification: By incorporating a property into your SMSF portfolio, you can achieve greater diversification in your investment strategy.
Control and Flexibility: SMSFs offer greater control over investment decisions compared to traditional super funds. By managing the property yourself or outsourcing to a property manager, you have a direct influence on your investment strategy. This allows you to select the property, negotiate the purchase price, and manage ongoing maintenance and tenancy issues according to your own preferences. You should always be aware of the risks, and obtain the appropriate financial advice on managing your SMSF.
Long-Term Growth: Property has historically been a reliable source of long-term capital growth. Owning an investment property through your SMSF allows you to potentially benefit from rising property values over time. This can contribute to the overall growth of your superannuation balance and provide financial security in retirement.
Let’s now look at the potential limitations or risks.
As we have detailed above, purchasing property in a SMSF has a range of potential benefits, but you need to be aware of potential limitations. Here are some to consider:
Higher Costs and Fees: There are costs associated with setting up and running a SMSF. These include establishment fees, annual SMSF audits, property management fees, legal fees for structuring the purchase, and potential borrowing costs. These costs can impact the overall return on investment, so careful budgeting and cost-benefit analysis are crucial. In terms of overall costs, as a high level estimate, you can expect these to be in the region of:
Complexity and Time Commitment: Managing an SMSF property involves a significant time commitment. You'll need to stay informed on relevant regulations, handle administrative tasks like annual returns, and potentially deal with repairs and tenant issues. Alternatively, outsourcing property management will incur additional costs.
Liquidity Issues: Compared to other investment options commonly held in an SMSF, property is a relatively illiquid asset. Selling a property can be a lengthy process and may not be feasible if you need to access your funds quickly. This lack of liquidity can be a significant drawback if you face unforeseen circumstances requiring access to your superannuation savings.
Regulation and Compliance: SMSFs are subject to a strict regulatory framework set out by the Australian Taxation Office (ATO). There are specific rules and limitations governing property purchases through an SMSF. Failure to comply with these regulations can result in significant penalties and potentially jeopardise the tax benefits associated with the investment.
Market Volatility: While property has historically shown long-term growth potential, it's not immune to market fluctuations. Economic downturns can lead to property value declines, impacting your investment returns and potentially creating financial difficulties if you've leveraged debt for the purchase.
Concentration Risk: Investing a significant portion of your SMSF balance in a single asset class introduces concentration risk. If the property market experiences a downturn, your overall superannuation may be impacted. Diversifying your SMSF portfolio with other asset classes can help mitigate this risk.
Let’s now look at how you apply for a SMSF home loan.
Applying for an SMSF loan with Yard is a straightforward process.
First, get pre-approval or conditional approval to get confidence in how much you can borrow through your SMSF. You can then start researching properties that meet your criteria. Once you have identified a suitable property, you can proceed with a full approval for your SMSF loan application.
Yard's SMSF loans have many useful features, including
No. While SMSFs can be used to invest in property, there are strict rules in place to prevent self-dealing. This means you cannot buy a property from yourself or a related party. The property must be purchased at market value and used solely for the purpose of generating income for the fund.
However, you can use your SMSF to purchase an investment property that you can rent out to generate income. This income can then be used to pay off the loan and potentially grow your superannuation savings.
The amount of money you need in your SMSF to purchase a property depends on several factors, including the property price and your chosen financing method. Generally, you'll need at least 20% of the property's purchase price as a deposit. This deposit can be funded by your SMSF's existing balance or through a loan.
Yes, you pay stamp duty on a property purchase through an SMSF. Just like any other property purchase, stamp duty is a government tax levied on the transfer of property ownership. This applies even if the property is purchased through an SMSF. Use our stamp duty calculator to estimate your stamp duty fee based on the purchase price of your investment property.
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