Updated on 5 February 2024
5 minute read
Property and superannuation. They're both ways to build financial security over the long-term. But should you use super to buy investment property? Let's look at the pros and cons.
Yes, it's possible to buy investment property with super. But you'll need a self-managed super fund (SMSF) to do it. And here lies the challenge.
Aside from the rules around buying an investment property with an SMSF, you'll need to weigh up the responsibilities, costs, and potential risks of running an SMSF.
Before deciding, you should get financial advice to make sure it's right for you.
Read more about how SMSFs work.
SMSFs come with many rules and regulations. And that includes when you want to invest in property.
Some of the key rules for SMSF property investment:
You can only use the property to give retirement benefits to your fund members (the sole purpose test).
You can't buy the property from another fund member or a related party.
You and other fund members can't live in the property, and neither can any related party.
You can't rent the property to other fund members or related parties.
The rules are a little different if you buy a commercial property with your super. For example, you can buy it from or lease it to a fund member for their business. But you must buy or lease it at market value.
It isn't just your relatives. The Australian Taxation Office (ATO) says a related party of your SMSF includes:
If you have an SMSF and there's enough money in it, you may be able to buy an investment property without borrowing money.
You can't use 100% of your super balance though. And the property needs to be part of your SMSF investment strategy.
A way to use money from your super as a home loan deposit is through a limited recourse borrowing arrangement (LRBA).
There are strict conditions on borrowing this way. And in general, you can only buy one property (or asset) with an LRBA.
Some things to think about before getting an LRBA:
Borrowing through your SMSF is complex. So, it's best to get advice from a qualified financial adviser and accountant.
You can learn more about LRBAs from the ATO.
Buying an investment property with super comes with many costs on top of the asking price of the property.
What you'll pay depends on your situation, your lender, and the property you're buying.
Get across all the fees and costs before signing a contract so you don't fall short. And be prepared for these to come out of your super balance or to add more to your super to pay for them.
Some examples of fees and costs when buying investment property:
Using super to buy investment property is a big decision. Here are 3 benefits and drawbacks to get you started.
It's a way to invest in property if you don't have enough in your bank account for a deposit and aren't old enough to access your super.
There are potential tax benefits, including a capital gains tax discount if you own the property for at least 12 months.
If you need to take out a loan to buy the property, the interest payments are tax-deductible to your SMSF.
It's complicated and time-consuming, and if you get things wrong, you could face expensive penalties.
If you use a large part of your super to buy the property, you risk having less diversification of your assets. This could impact your retirement savings if the property value drops.
It often costs more to buy investment property through an SMSF, especially with an LRBA. And you need to make sure you have enough cash flow in your fund to pay for expenses.
If you're borrowing to invest (gearing), you can get higher returns when the values of your assets are rising. But it could also mean much worse returns when asset values are falling.
It's a high-risk strategy. And it's made even more risky by the fact that when you buy a property in an SMSF with borrowed money, you're investing with limited diversification. When you diversify, you lower your portfolio's risk and it helps you get more stable returns.
If buying investment property with super isn't right for you, there are other ways to boost your retirement savings and set yourself up for a great future.
Use your account with us to build an investment strategy that includes property assets. You can choose the options that suit your risk tolerance, timeframe, and goals.
The great news is that advice about your super is included in your membership. So, you can get help from our qualified financial advisers to set up your investment mix.
Superannuation is a tax-effective way to build your financial wealth. Check the different ways you can add to your super and take advantage of any tax benefits that might be available.
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