Buying investment property with SMSF

UNO's guide to SMSF investment properties

Guide to using your super to buy a house, including SMSF investment property

Chances are you’ve thought of buying - or maybe even know someone who owns - a smsf investment property

If you’re looking to buy a house to live in with your super, your options are pretty limited. However, for those seeking to invest in property through their super, it is certainly possible.

But how do super property investments work, and are they worth it? Here’s everything you need to know about using your superannuation to buy a home.

Using SMSF super to buy an investment property

You can use your super to buy commercial or residential property through a self-managed super fund (SMSF), but you won’t be able to live in it.

Investing in commercial or residential property through Self Managed Super Funds (SMSF) is increasingly popular.

An estimated 1.1 million Australians have Self Managed Super Funds (SMSF) worth $820 billion - around a quarter of all super assets in the country.

UNO finance broker Danny Buckingham said SMSFs can access finance—also known as a Limited Recourse Borrowing Arrangement or LRBA—to fund property investment.

“UNO has access to SMSF loans with multiple lenders. These products typically require a Loan to Value Ratio (LVR) of 70-80 per cent and require you to have a decent buffer in your fund.”

“SMSF investments homes are much like normal super. They need to generate rental income and can’t be lived in by fund owners or relatives - it can’t be a holiday home and you can’t have a family member living there.

“It’s important to note you can’t use equity from an existing property. You need a decent fund balance with a contribution record,” Danny said.

Property acquired with SMSF must be held to provide retirement benefits to fund members and not be lived in, acquired by, or rented to your family.

Like any investment, SMSFs property investments require research and come with ample risks. Hence, investing in property with your super could either help or hinder you during retirement.

“You need to talk to your financial planner and make sure it is a suitable road to go down before making any decision,” said Danny.

Thinking about a SMSF investment property? Have a chat with Danny today.

What is a SMSF?

A self managed super fund (SMSF) is a superannuation (retirement savings) account that you manage yourself. They are different from industry and retail super funds which are managed for you.

With a SMSF, you can decide how your money is invested. Any returns made are taxed at 15%.

Having control over your retirement is appealing - you could even use a SMSF to buy property. But there is lots of work and risk involved.

To begin, you’ll need to establish a trust/trust deed, register with the ATO, and form investment and wind-down strategies. Professionals like financial and tax advisors are required for most of these steps.

SMSF can have up to six members, who are all trustees of the fund. Trustees are responsible for running the fund with member benefits in mind and are liable for super and tax laws.

Pros and cons of using your super to invest in property

One drawback of SMSFs is the administration involved. Establishing and running a fund isn’t simple; you’ll be liable for record-keeping, financial reporting, and the possibility of auditing.

Next, a super fund invested primarily in property lacks diversification and is, therefore, potentially less intolerant to risk.

However, SMSF are appealing to those seeking to control how their retirements are funded and are tax-effective.

Investing in property also has tax advantages (within the fund). While SMSF rental income is taxed at 15%, mortgage repayments are tax deductible.

Read more: How to reduce CGT on an investment property

Unlike on most other investment properties, capital gains or rental income is not taxable once a beneficiary retires.

Is property a good investment option for SMSF?

Investing in SMSF property can be appealing as it adds a property to your portfolio without impacting your finances upfront.

Property values have increased by an average of 6.8% annually over the past 25 years.

Super fund performance varies depending on the fund and portfolio. Australian Super’s Balanced option, for example, has a 10-year annualised return of 9.3%. Of course, funds charge fees which should also be considered.

All investments have upsides and risks. It is important to consider these and whether they are right for you by speaking to a financial advisor.

How much deposit do you need for a SMSF property?

SMSF properties typically require a LVR (loan-to-value-ratio) of 70-80 per cent. That’s a $150,000 (20%) to $240,000 (30%) deposit on a property worth $800,000.

You will also need money set aside (generally around 5%) to cover other fees and charges like stamp duty and professional fees like conveyancers.

Commercial property investment requires a higher deposit with a LVR of 30%.

How much super do I need to buy an investment property?

There is no hard and fast rule, but UNO broker Danny Buckingham says a balance of “a few hundred thousand” generally does the trick. Funds require a history of regular contributions.

Using super to buy a house to live in

Can I use my super to buy a house?

You cannot use your super to buy a house to live in. Although, eligible first home buyers can access up to $50,000 in voluntary (non-employer) contributions towards a house deposit.

Under the First Home Super Saver (FHSS) Scheme, eligible first home buyers can withdraw from their super to buy a house, provided:

  • They’re 18 or older
  • You have not owned a property before
  • You live in the property for at least six months

Red UNO's ultimate guide to FHSS here

Can I use my super as a house deposit?

Eligible First homebuyers can use their super under the FHSS scheme. It is also possible to use your existing super as a deposit for an investment property through a self-managed super fund.

Disclaimer: Advice in this article is general in nature and does not constitute financial advice. Always seek professional advice that considers your individual circumstances when making financial decisions.

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