Superannuation funds have evolved beyond their primary retirement savings role in recent years. Today, many Australians are using their super balances to invest in property. However, this option comes with strict guidelines and is not accessible to everyone. Only those with a Self-Managed Super Fund (SMSF) or those utilising the First Home Super Saver (FHSS) scheme can leverage their super to purchase property.
Using your super to invest in real estate can be an appealing alternative to traditional loans, as concessional tax rates apply to SMSF income, and the loan interest payments are tax-deductible to the fund. Understanding how much super you need is crucial if you’re considering property investment as part of your investment strategy.
Understanding Your Self-Managed Super Fund Requirements for Buying Property
Suppose you have enough money saved in your SMSF to purchase a property outright; great! You have more than enough super. However, this is not true for many Australians, especially as property prices climb.
When purchasing property through an SMSF, Lenders typically require a 20%-30% deposit. Lenders, such as Homestar Finance, may allow you to use your SMSF cash holdings to cover the deposit if you have sufficient cash deposits in your SMSF.
What are SMSF loan liquidity requirements?
Most lenders apply a ‘liquidity test’ on SMSF loans. This test requires that a minimum of between 10 and 20 per cent liquid assets (cash and shares) or a fixed cash amount must remain in the SMSF after the investment property is purchased. This additional liquidity test can often restrict how much an SMSF can borrow.
At Homestar Finance, we do NOT apply a liquidity test. Instead, you can borrow the total amount you need without liquidity restrictions – saving you time and extra paperwork.
Additional Costs To Consider When Buying an Investment Property with Super
Besides the deposit and the minimum liquidity required, other costs should be considered when purchasing property with your super. These may include:
- Stamp Duty: A tax based on the property’s value.
- SMSF set up and ongoing management cost: Expenses associated with setting up and managing the self-managed super fund.
- Property Expenses: Ongoing costs related to property ownership.
- Vacancies: Loss of revenue due to potential time without tenants.
- Advisory Fees: Costs for professional financial advice. We recommend you obtain independent legal and financial advice on compliance with the Superannuation Industry (Supervision) Act 1993 and the considerations regarding property investment through an SMSF.
- Ongoing Property Management Fees: Maintenance, rates, and tenant management costs.
- Loan Costs: Interest payments and other loan-related fees.
- Insurance Costs: Protecting your investment against risks.
- Legal Fees: Costs for legal assistance during the purchase.
Not every buyer will encounter all these expenses, but it’s essential to factor in potential costs. Consulting with a financial adviser can help streamline the process and avoid unnecessary expenses.
How Does Buying Property with Super Work?
Purchasing a property through your self-managed super involves a few different steps compared to traditional methods. Here’s what you need to know about the process:
Set Up an SMSF
You need a Self-Managed Super Fund, as retail or industry funds cannot directly purchase property.
Assess Fund Balance
Ensure your SMSF has enough funds to cover the 20%-30% deposit and additional liquidity requirements (remember, Homestar Finance does not apply the additional liquidity requirements).
Establish a Holding Trust
If using your SMSF for property investment and require an SMSF loan, you’ll need a specific holding trust structure, typically a bare trust, until the loan is paid off. A custodian bare trust structure allows your SMSF to receive income and capital growth from the property, re-invest the benefits into the fund, and repay the SMSF loan. When the loan is repaid, the SMSF acquires the deed title. The diagram demonstrates how the arrangement.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any legal or financial commitment, you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.
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Frequently Asked Questions
Can I use my super for a house deposit?
Yes, your super can be used for a house deposit. It is generally advised that you should only think about buying a property with your super if you have enough to cover the deposit.
Is it worth buying an investment property with super?
It is worth buying property investment with a super if you do not want to impact your current personal finances or future borrowing capacity. However, you should only use your super as a means of buying property if you know you are capable of making those funds back before retirement; otherwise, you may not be able to retire comfortably.
Can I withdraw from my super to buy an investment property?
You can withdraw from your super to buy an investment property, but only if you have a SMSF, or are viable for the First Home Super Saver (FHSS) scheme. Only first home buyers can use the FHSS scheme and need the verification of the Australian Taxation Office to ensure their finances are enough to qualify for the scheme.
In contrast, anyone who has a SMSF can use their super to buy an investment property, but you are not allowed to live in it as you are a ‘property investor’, rather than a residential buyer.
Can I ultimately live in my SMSF property after retirement?
You are allowed to live in your property investment after retirement so long as you pass these requirements:
- It was bought by your SMSF
- It passed the sole purpose test
- The property has been transferred into your name
- You have passed your preservation age and can now legally access your superannuation
