The superannuation fund is a sleeping giant for many Australians, a safety net for when their regular income stops and they are retired. For others, the super is their means to both financial security and a continuing substantial income after retirement.
Some employees are content to discuss with their employers where they want their funds invested, which is their right by law. The more direct and popular approach is through direct investment of the super into high income-generating assets such as property.
Is the Superannuation Fund Accessible for Investments?
Since employees can direct the placement of their funds, yes, you can place your super in a Self Managed Superannuation Fund, or SMSF, as a trustee. The trustee manages the SMSF, designing and planning an investment programme for long-term retirement benefits.
The super may be invested in shares, in term deposits, and even in collectibles. However, the super may also be invested in property. Property is a viable investment because of the strong market and steady income.
How Can You Use the Super to Buy Property?
It is possible for an SMSF to be used to buy a profitable commercial or residential property using the “limited recourse loan,” better known as the Limited Recourse Borrowing Arrangement, or LRBA. The SMSF usually can fund at least 20% of the property value. Using the LRBA, the rest of the funds needed to buy the property can be borrowed against the property.
Loan repayments will come from the SMSF, and from employer and trustee contributions. All the income (rent) from the property will automatically go to the trustee. If you want to start the process, finding viable properties through online listings such as iBuyNew or with real estate agents is the first step.
What Are the Benefits?
The attractive thing about investing the SMSF in property is that besides the regular income from rent, property values in Australia are rising at a steady rate. There is also a tax cap of 15% on supers, meaning that the rent cannot be taxed more than that, neither can the capital gains if the property is sold. On average, an additional 5% of the super could be earned from property investments, than if it is left in the regular super funds. If managed wisely for the long-term, upon retirement you can live off income that matches your current salary.
What Are the Risks?
Because the demand for SMSF LRBAs is high, property bought under the LRBA is more expensive, and the loan interest higher. Since the loan repayments are taken from the SMSF cash value and contributions from the trustees, these costs need to be factored in. Additionally, the property cannot be substantially altered until the loan is paid off. Possible returns on investment would need to be foregone as long as the payments continue.
Is it Possible to Buy Property Using Superannuation?
The answer is a clear yes. However, the uses of the property will always be limited. It can only be used as a source of retirement income, and you cannot live in it or use it directly. Buying the property has its own limitations, since it cannot be bought from any relation of a trustee. What is sure is that it is feasible, and can be a worthwhile investment for an active and fruitful retirement.