In recent years, superannuation funds have developed beyond their original purpose as a means of saving money for retirement. Now, your super balance can be used to fund your purchase of an investment property.
Using your super to buy an investment property does come with strict guidelines and is not available to everyone. This is because only those with a Self-Managed Super Fund (SMSF), or those who have tapped into the First Home Super Saver (FHSS) scheme, can use their super to buy property.
Many Australians find this option appealing due to the benefits it provides as an alternative to taking out a loan, as well as the flexibility it provides in utilising their finances. Using super to begin property investing may be the next step in growing your investment strategy.
How much super do I need to buy an investment property?
Put simply, if you have enough money saved in your super fund to outright purchase a property, then you have more than enough super. However, it is not that simple for many, especially as property prices in Australia continue to rise.
Instead of using the funds you have saved in your bank account and possibly having to take out a substantial and lengthy loan, you can use your super fund to cover the full 20% deposit needed to take a loan in its name. This process of taking out a loan with your SMSF is called a Limited Recourse Borrowing Arrangement (LRBA).
On top of this, multiple lenders request minimum liquidity in the loan amount, standing at 10% in cash. These costs can add up quickly, requiring a large enough superannuation fund to cushion the withdrawal of such an amount. However, some lenders don’t require a minimum liquidity test, so ask your lender about their requirements.
Let’s look at an example that will provide a clear picture of the main costs involved:
- The property price sits at $800,000
- The necessary loan sits at 80% of this amount, coming to $640,000
- The 20% deposit needed for this loan is $160,000
- $64,000 liquidity is required in your bank account
Based on this example, you would require $224,000 to be sitting in your superannuation fund to purchase an $800,000 property. This excludes any additional costs involved in the process, so it may be best to save up more than the necessary amount.
Costs involved in buying an investment property with super
Beyond the necessary 20% loan deposit and 10% minimum liquidity, there are additional costs involved in buying an investment property with superannuation funds. Often, these other costs are determined by your lender or bank, and usually involve:
- Stamp duty
- Closing costs of your SMSF
- Property expenses
- The time without tenants in your new commercial property
- Advice fees
- Ongoing property management fees like maintenance and rates
- Bank fees and loan costs, such as interest or loan repayments
- Agency fees
- Insurance costs
- Upfront fees
- Legal fees
Although you may not have to face all of these costs in the process of buying property with your SMSF, it is best to factor in all the potential costs.
These fees may be avoided through the help of a financial adviser, however, so you may want to reach out to a professional you trust for guidance.
How to calculate how much super you need for a deposit
The general rule of thumb for those who cannot buy a property outright is that you will need 20% of the property’s price saved up in your superannuation fund. This is because most banks will lend up to 80% of a property’s asking price, thus, leaving the remaining 20% to be covered by the buyer.
Buying a property with super: How it works
When buying a property with super, you may find that the process slightly differs in comparison to more traditional methods of property purchase. This is because an SMSF has stricter regulations around it than most types of superannuation, making qualifying for property investing a more structured process.
What is an SMSF (self-managed super fund)?
An SMSF, also known as a self-managed superannuation fund, is a means of saving for retirement. It differs from other types of super funds by having the members also be SMSF trustees, allowing them to manage it for their benefit. These members are also responsible for complying with super and tax laws.
How does SMSF property investment work?
When it comes to understanding how SMSF property investment works, important aspects to consider include the following:
- You need a high enough fund balance to not only cover the 20% deposit for a home loan but depending on your lender, have extra funds for minimum liquidity.
- You need an SMSF as retail or industry funds cannot buy direct property.
- A specific holding trust structure is needed until the loan is repaid if you are using your SMSF to invest in properties. This will allow your SMSF to be credited with income and capital growth from the investment, even as the trust structure has legal ownership. Ownership will be transferred back to the SMSF once the asset has been fully repaid.
- SMSFs have strict borrowing conditions, including that only a single asset can be bought with your super fund. This is set out by an LRBA and can be more easily followed if you seek out professional advice.
What is an LRBA (limited recourse borrowing arrangement)?
The LRBA is an agreement that allows an SMSF trustee to borrow the funds needed to purchase a property from a third-party lender, like a bank.
When to use super to purchase an investment property
The best time to buy an investment property depends on various circumstances, including those out of your control such as market conditions, interest rates and the ratio of supply and demand. Due to this uncertainty of circumstances, it is more beneficial to determine the best time to buy through your controllable factors; your personal and financial circumstances.
You should always check that you have sufficient enough income to purchase a property before reducing any non-deductible debt you have. After that, it is a matter of securing a loan that suits you and does not go over your borrowing capacity.
Although there is no one-size-fits-all answer to when the best time to use your super to purchase property investment, you can determine the best time for you and your finances.
How an SMSF loan can help
With Homestar Finance, you can break into the investing market with our property SMSF loans. Our team of loan specialists will work with you to get you the best interest rates and loan-to-value ratio for your dream investment property.
The process works just like any other home loan, and our specialists will be there every step of the way to support you. Get started today by calling us at 1300 462 209, or by contacting us online.
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 commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.
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Understanding more about how much super you need to buy an investment property
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 buy an investment property with a 10% deposit?
The minimum required deposit on a house is 10%, but a 20% deposit is preferred. For any percentage lower than 20, you will need Lenders Mortgage Insurance, which can negatively affect your finances in the long run.
Therefore, it is best for you and your financial situation if you do not buy a property investment with a 10% deposit.
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
