A guide to investing super in property

Combining the tax advantages of superannuation with tangible assets creates a unique opportunity for long-term wealth accumulation. And using super to invest in property with a Self-Managed Super Fund is catching the eye of many Australians. This investment avenue is more accessible, but also demands careful planning and understanding.

Can I use my super to invest in property?

Yes, the most common way to do this is through a Self-Managed Super Fund (SMSF), but there are specific rules and conditions you must follow. Your superannuation investment property must meet certain requirements: it must be a single acquirable asset, and any income generated from it must go back into your super fund.

Can I use my superannuation to buy a house?

The short answer is yes, you can use your superannuation to buy a house. However, an ‘arms-length’ rule applies, meaning all transactions must be on commercial terms, and you can’t live in it or rent it to close friends or family members. It must serve as an investment within your SMSF, and it’s meant to generate income for your retirement fund. You can use it to buy a commercial property for your personal business, but residential properties for personal use are off-limits.

Choosing your superannuation investment property

Commercial properties

Offering typically higher rental yields and longer lease agreements, investing your superannuation into commercial properties can provide a stable and possibly higher income. However, these properties can be more expensive to buy and are sensitive to economic conditions.

Residential properties

Residential properties usually experience quicker capital growth and are easier to manage. However, they often have shorter lease terms, potentially leading to higher vacancy rates and inconsistent income.

Benefits of using super to invest in property

Advantageous tax rates: Within an SMSF, earnings from your superannuation investment property are taxed at a reduced rate of 15%. This presents an attractive advantage when compared to personal income taxation.

Commercial leverage:  If you own a business you can invest your superannuation in commercial real estate and lease it back to your own enterprise. Making your rent another source of revenue for your retirement savings.

Enhanced buying capacity: SMSFs can have up to four members, allowing for collective investment. Pooling resources can significantly enhance your fund’s purchasing capabilities.

Reduced tax on long-term assets: Holding a superannuation investment property for over one year can result in lowering the maximum effective rate to 10%. The reduced capital gains tax can make the asset even more lucrative when it’s time to sell.

What to consider before investing super in property

Transactional boundaries: It’s essential for investors to know the boundaries of their SMSF transactions. You’re prohibited from leveraging any personal connections for your fund’s benefit, such as using super to invest in property then renting it to friends or family.

Unforeseen costs: Expenses like stamp duty, legal fees, and ongoing maintenance can significantly erode your returns. Before diving in, make sure you fully understand the financial implications and have budgeted for additional outlays like annual tax returns and audits, which need to be completed by a qualified tax agent. 

Limited diversification: When your superannuation balance falls below $500,000, investing super in property can dominate your portfolio, raising the stakes and narrowing your financial safety net. Such a targeted investment strategy has its own set of risks that need careful consideration.

Regulatory uncertainties: Laws and regulations for investing super in property through an SMSF can change, often without much notice. Such changes could have a direct impact on your investment strategy and may even necessitate a complete restructuring of your portfolio. Staying abreast of the legislative landscape and being prepared to adapt is crucial for long-term investment success.

Often complex: Using super to invest in property is governed by a host of complex rules that carry heavy penalties for mistakes. But professional advice can guide you, making it easier to adhere to regulations and avoid pitfalls.

Take action with My Online Adviser

Investing super in property through an SMSF offers both opportunities and challenges, and seeking expert advice is key to navigating the complex landscape effectively. A team of experts like ours at My Online Adviser can help you manage and compare superannuation funds while providing ongoing support. Ensure that your investment journey is both compliant and geared towards a successful retirement.