The Pros and Cons of Buying Property with Your Superannuation

January 5th, 2024

Should You Use Your Super to Purchase Property? A Close Look at the Advantages and Disadvantages

Most superannuation funds lack sufficient cash reserves to buy property outright, so borrowing within super is often necessary to fund a property purchase. In this post, we’ll take an in-depth look at the key potential pros and cons of using your super to invest in real estate.

Potential Advantages of Using Superannuation for Property Investments

There are several possible benefits to using your super fund to buy an investment property:

  • Early access to super – Buying property via your super allows you to access your retirement savings sooner to acquire real estate assets. While you can’t withdraw super directly, borrowing through your fund utilizes your super balance as security for the loan.
  • Ownership of a tangible asset – Property is a tangible asset that your self-managed super fund will fully own and control. Shares are volatile, but your super will own the bricks and mortar.
  • More stable asset value – Property prices tend to fluctuate less than shares subject to daily market swings. This provides stability within your super’s asset portfolio.
  • Increased potential returns through leverage – Borrowing to buy property within super allows you to leverage your retirement savings for potentially greater gains than super alone may achieve.
  • Access to asset classes previously unavailable – Super gearing opens up direct property investment options not traditionally accessible for super funds.
  • Tax benefits – The interest payments on property loan repayments within super are tax deductible. Salary sacrificing contributions to repay the principal can also provide tax savings.
  • Lower tax rate on rental income – Rental income is taxed at just 15% during the accumulation phase, rather than your personal marginal tax rate. This helps boost returns.
  • Tax-free rental income in pension phase – Once in pension phase, earnings from property owned by your super, including rent, are completely tax-free.

Potential Disadvantages of Using Super for Property Investments

However, there are also some possible downsides to be aware of:

  • Lack of liquidity – Property locks up a portion of your super in an illiquid asset. This may limit cash flow, especially early on before contributions increase balances.
  • Property can’t be used as loan security – The purchased property itself can’t be used as security for any other future borrowing outside of super.
  • Restrictions on withdrawals – Funds invested in property can’t be accessed until a condition of release is satisfied under super rules.
  • Market conditions influence value – The ultimate value of the property is dependent on market conditions at the time of sale. Price growth is not guaranteed.
  • Rental income relies on tenancy – Periods without a tenant mean no rental income is generated to help cover repayments.
  • Obligation to meet interest payments – Your super fund is responsible for meeting ongoing interest payments on the loan. If cash flow is tight, interest can be capitalized onto the loan principal.
  • Negatively geared challenges – If total interest and expenses exceed rent received, this shortfall will need to be covered through additional super contributions.
  • Restrictions on residing in property – You can’t live in the property purchased with super without meeting strict exemption criteria.
  • Potential impact of future legislative changes – Changes to super or property investment laws may affect benefits or require adjustments.
  • Ongoing compliance requirements – Administering direct property investments within super requires annual audits and compliance paperwork.

Key Factors to Consider Before Using Super for Property

If you’re thinking about using your super to invest in real estate, some key considerations include:

  • How close you are to retirement age – the younger you are, the more time to recoup the funds invested.
  • Whether rental income exceeds expenses – crunch the numbers to ensure cash flow viability.
  • If the property market has strong growth potential – don’t buy in flat or falling markets.
  • If you have the time and skills to properly manage an investment property – consider using a property manager if not.
  • Whether you are buying with a partner – purchasing jointly shares costs and workload.

Tips for Making a Successful Super Property Purchase

To help make the most of investing your super in property:

  • Research areas with strong tenant demand and attractive rental yields. Near hospitals or universities can be good target markets.
  • Look for value properties with renovation potential, rather than overpaying for high end real estate.
  • Crunch the numbers conservatively to model expected returns versus expenses. Build in contingencies for vacancies and rising rates.
  • Seek pre-approval for finance within super and understand the tax implications involved.
  • Inspect a wide range of properties before deciding. Don’t rush into a purchase or overpay.
  • Aim to steadily pay down the mortgage over time and allow compound capital growth to build wealth.

Key Takeaways – Using Super for Property Investments

In summary, the key points on using super for property are:

  • It reduces your retirement balance but allows you to enter the property market earlier.
  • Careful management of rental returns and capital growth can offset the super reduction over time.
  • Maximizing returns versus expenses is crucial to making this strategy work financially.
  • Markets with strong tenant demand, such as near hospitals or universities, provide ideal opportunities.
  • Partnering with others to jointly purchase a property spreads the investment risk and burden.
  • With astute planning and advice, investing super into property can build significant long-term wealth.

Purchasing property can be a smart wealth-building strategy if done right. But before using your super to buy real estate, consider your personal circumstances and risk tolerance. Book a complimentary consultation with Empire 8 Property to evaluate your investment objectives and get tailored advice.  As property investment specialists, Empire 8 Property can guide you in weighing the pros and cons and making fully-informed decisions aligned to your financial situation and long-term goals. Our expert team can assess your appetite and capacity for risk, crunch the numbers on potential returns, and provide insights on local market conditions. Don’t go it alone – Contact Empire 8 Property today to set yourself up for success!