By Guest Blogger, Theo Chambers
For decades, the New South Wales Central Coast region was in a property market holding pattern. It was flying under the radar of homebuyers and investors alike. But COVID’s significant upheaval brought the region into the limelight. Now, a raft of drivers across the political and economic spectrum will deliver exciting times to the Central Coast – and those who own property will be among the biggest beneficiaries.
Anthony Knight, Principal buyers’ advocate for Propertybuyer on the Central Coast, has lived in the region for decades. We recently chatted about the region and why he’s excited about what’s to come.
Do you & your partner/sibling have a combined superannuation balance of $150,000? Did you know you can use your superannuation to invest in property?
Using your Self-Managed Super Fund (SMSF), you can leverage your superannuation to invest in real estate, creating a pathway to build wealth and secure your financial future. With as little as $150,000 in your SMSF, this amount can act as the deposit to purchase an investment property, unlocking opportunities that may otherwise seem out of reach.
Investing in property through your SMSF not only allows you to tap into the potential of the real estate market without dipping into personal savings but also enables you to strategically grow your retirement nest egg. By combining the tax advantages of superannuation with the long-term growth potential of property, this approach can be a game-changing move for those looking to maximize their financial returns.
Whether you're aiming to diversify your investment portfolio or establish a steady income stream for your retirement, SMSF property investment could be the strategy you've been looking for.
Using your superannuation could be the key to unlocking a wealth-building strategy that supports your financial future.
Contributions to your Superannuation Fund
The Australian Government supports retirement savings through compulsory employer superannuation contributions of 11.5%. You can boost your super by making personal contributions, which are separate from employer contributions and salary-sacrifice arrangements. These funds grow in a low-tax environment to help secure your retirement.
Personal Concessional Contributions
Personal concessional contributions are super contributions taxed at a lower rate of 15%, compared to your marginal income tax rate (19–45%). You can claim a tax deduction for up to $27,500 per financial year. If your super balance is under $500,000, you may also carry forward unused concessional caps from the past five years, potentially claiming up to $137,500 as a tax deduction.
Non-Concessional Contributions
Non-concessional contributions are personal, tax-free super contributions not claimed as tax deductions. They are capped at $110,000 per year or up to $330,000 over three years if you're under 75 and your balance is below $1.9M. These contributions are not included in the fund's taxable income.
Downsizer Contributions
If you are 55 or older, you can contribute up to $300,000 from the proceeds of the sale (or part sale) of your home into your SMSF. A downsizer contribution is a non-concessional contribution, but it doesn't count towards the contribution cap.
SMSF Home Loans
Purchasing property through an SMSF once required having the full purchase amount upfront, which was a significant barrier for many. However, regulatory changes now allow SMSFs to borrow funds for property investments, leading to increased property acquisitions.
With an SMSF loan, you can use your superannuation to borrow funds for investment in residential or commercial property before being able to withdraw from your super. Rental income from the property is used to repay the loan, and any excess is reinvested into the SMSF.
It's important to note that SMSF loans have LVR restrictions (up to 90%) and typically have higher interest rates (starting from 6.99%) than traditional home loans and are offered by a limited number of lenders. This is because, in case of default, the lender can only claim the property in question, not other SMSF funds or income.
Once the loan is fully repaid, the SMSF holds the legal title to the property. From there, the SMSF can continue to earn rental income or sell the property, with proceeds returning to the fund.
Let's Run the Numbers
If we consider an individual with $150,000 in their superannuation, you are permitted to utilise the entire sum within your superannuation for purchasing the property, covering associated expenses like stamp duty and fees.
For residential properties, borrowing is possible up to 90% of the property's value, whereas for commercial properties, borrowing can extend up to 80% of the property's purchase price.
In this scenario, we will assume the client is purchasing an investment property worth $600,000 in Sydney with an 80% LVR:
Purchase Breakdown:
- 20% of property purchase price = $120,000
- Stamp Duty plus costs approx. = $21,890
- Total sum taken from super = $141,890
Total mortgage loan required = $480,000 approx.
If you were to purchase your property at the age of 40, and we assume a conservative 5% growth per year on your investment property (based off historical data):
Average capital growth p.a. = $60,743
Capital growth over life of investment (27 years) = $1,640,074
At retirement age of 67, the property would be worth $2,240,074
Advantages of Purchasing Property through an SMSF
Real estate has consistently outperformed other investment options over the past decade, which is why 67% of Australians own a property & 20% own an investment property. It is also why residential real estate underpins Australia’s wealth and is currently worth $11.1 trillion, whilst Australian listed stocks are worth $3.3 trillion and Australian superannuation is worth $4.1 trillion.
The advantages of purchasing property through your SMSF include:
- Diversification: In Australia, property investment within an SMSF provides an opportunity for diversification in a market known for its resilience and long-term growth. Historically, the Australian property market has shown consistent growth trends, with annual average capital gains ranging between 5% - 10% in various regions. The Australian property market often operates independently of other asset classes, making it a valuable addition for risk management within an investment portfolio.
- Leverage and Property Investment: According to ATO statistics, the value of assets held by SMSFs through limited recourse borrowing arrangements has shown steady growth over recent years, reaching billions of dollars in property holdings. Leveraging within an SMSF in the Australian property market can potentially amplify returns.
- Tax Advantages: The Australian tax system offers certain advantages for SMSF property investments. Rental income derived from property investments held within an SMSF is generally taxed at a concessional rate of 15% (& tax free after retirement). Additionally, capital gains made on properties held for more than 12 months within an SMSF also benefit from the same concessional tax rate. Additionally, after retirement, rental income is tax free and if the property is sold, it might be Capital Gains Tax exempt.
Things you need to know
Costs associated with setting up an SMSF
Setting up and running an SMSF includes initial expenses like creating the fund's rules (trust deed) and forming a company for trusteeship. Ongoing costs involve accounting, audits, investment fees, and property expenses if applicable. These expenses vary based on the fund's complexity, investments, and professional services, so it's essential to plan and budget accordingly.
It is important to get advice from a licensed financial adviser. Anyone who gives advice on an SMSF must have an Australian financial services license (AFSL).
Navigating profits & losses
All profits and losses generated within your SMSF remain within the fund. If your property investment earns a profit (positive gearing), those profits stay within your SMSF. Similarly, any losses incurred get managed during tax time, remaining within the fund. Typically, the funds stay in your superannuation until retirement, though there are exceptions.
SMSF Property Restrictions
Your SMSF loan must meet the obligatory sole purpose test to be able to purchase an investment property. The criteria states that the investment property:
- Is only for benefit of the fund members in their retirement;
- Cannot be occupied by any family members, friends, or associated parties;
- Cannot be purchased from any family members, friends, or associated parties; and
- Cannot be leased to any family members, friends, or associated parties.
For commercial SMSF loans, you can rent your property to a business that is owned by a trustee/s, provided it is used for business purposes and is paying rent that aligns with the market standard.
Renovations
You're allowed to perform simple maintenance, such as updating a bathroom. However, you're not permitted to significantly change the property's essence unless you've completely paid off any loans associated with it. Once loans are settled, the rules alter significantly.
Risks of purchasing a property through an SMSF
- Single Asset Risk: Concentrating super in one property reduces diversification and increases exposure to market downturns.
- Liquidity Challenges: Rental income must cover loan repayments, leaving limited cash for other SMSF obligations or unexpected expenses.
- Regulatory Complexity: Strict compliance with SMSF rules is essential; breaches can lead to penalties or disqualification of the fund.
- Inability to Access Funds: Unlike personal property investments, SMSF property cannot be used for personal benefit or occupied by fund members or relatives.
- Repayment Defaults: In case of default, the lender can only seize the property, leaving the SMSF with a financial shortfall.
- High Setup and Ongoing Costs: SMSF property purchases involve setup, legal, and ongoing compliance costs, reducing overall returns.
- Market Volatility: Property values can fluctuate, potentially impacting the long-term growth of your retirement savings.
- Limited Flexibility: Selling SMSF property can be time-consuming, particularly if cash is needed quickly for retirement or other investments.
How Can We Help?
Our team at Shore Financial can guide you through every step of the process. Whether you’re looking at residential, commercial, or industrial property, we have the expertise to assist you in making informed decisions.
Get Started Today!
If you're curious about how to use your superannuation to invest in property, or if you’re ready to explore opportunities, our team at Shore Financial is here to help. We can arrange a complimentary consultation to discuss your options and answer any questions you may have.
Contact us on 1300 416 700 or info@shorefinancial.com.au to book your appointment.
Investing in property through your superannuation could be a powerful strategy to build wealth and secure your future. We look forward to helping you make the most of your retirement savings.
Call Propertybuyer today on 1300 655 615 or email info@propertybuyer.com.au or use this link to send your enquiry today to get started with your property search to find a suitable property to fit your budget and SMSF investment strategy.
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