Using super to buy investment property
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.
Can I buy an investment property with my super?
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.
At a glance
- Using super to buy investment property is possible but it’s not for everyone.
- You’ll need the financial and legal skills and time to set up and run a self-managed super fund.
- Another option is to invest in property assets through your Australian Retirement Trust account.
Rules for buying investment property with super
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.
What's the definition of a related party?
It isn't just your relatives. The Australian Taxation Office (ATO) says a related party of your SMSF includes:
- All members of your fund
- Each member's relatives
- The business partners of each member and their spouses or children
- Any company controlled or influenced by a member or their associates
- Any trust controlled by a member or their associates
- Employers who contribute to your SMSF and their associates.
How to buy investment property with super
Buying the property outright
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.
Getting a loan
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:
- No major renovations: You're not allowed to use the money you borrow to make significant improvements to the investment property.
- Can cost more: Loans for SMSF investment property can have higher interest rates and more fees than regular investment loans.
- Your SMSF pays the loan: You must always have enough in your fund to meet all loan repayments, insurance premiums, and other expenses.
- You're liable: If you break the rules for borrowing, the ATO will hold you (as an SMSF trustee) responsible and you could face civil or criminal penalties.
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.
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What costs are involved?
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:
- Advice and accountant fees
- Upfront fees
- Stamp duty
- Commissions to real estate agents and developers
- Legal fees
- Insurance costs
- Loan costs and bank fees e.g. interest
- Rates, maintenance, and other property management fees
Pros and cons of buying investment property with super
Using super to buy investment property is a big decision. Here are 3 benefits and drawbacks to get you started.
Pros
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.
Cons
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.
Pros and cons when borrowing
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.
Other options for investing with your super
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.
Invest in property assets through super
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.
Add extra to your super
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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