Using super to buy an investment property is a minefield

MORE Australians want to safeguard their retirement by tapping into the booming property market, but there are some crucial things you need to know first.

PROPERTY and superannuation are two of the most important asset classes when it comes to looking after your long term wealth, so it’s easy to see why many Australians look to combine both.

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Establishing a self-managed superannuation fund (SMSF) and using it to buy investment property is a viable strategy that is rising in popularity in Australia. This can be put down to more of us wanting to take charge of our own retirement money from an earlier age and of course the love affair that this nation has with real estate.

However, there are some very fundamental reasons that this will not be the right option for everyone, so before you take the plunge, here are a few tricks and traps that you need to know.

First, unless you have enough money in your SMSF right off the bat, you will need to borrow money for your fund to purchase a property. Here’s where it can get tricky.

First, any money your fund borrows from the bank will actually count against your own serviceability for future loans.

So if you borrow $300,000 for an investment property within your SMSF, a bank will take $300,000 off their calculations of your serviceability if you attempt to borrow outside of super for a family home, investment property, business or car.

Once you have borrowed within super, you can only make repayments using 9.5 per cent of your income (your contributions to superannuation), plus any rental income generated by the property.

If you are also thinking about investing in property in a nice tropical location and holidaying there, or letting friends and family members rent it from you, think again. You and your associated parties are prohibited from making use of the asset until you reach retirement age. Basically, although you can manage the investments made by your superannuation, the assets are there for your retirement and if you try to pull a number on the ATO, they will pull even bigger numbers on you, in the form of enormous fines and other penalties. These rules extend to all asset classes in SMSF investing. If you invested in a rare painting or artwork for example, you wouldn’t be allowed to display it in your home until retirement.

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The best way to use super to invest in property is by going for affordable properties in markets with low rental vacancy rates, where the rent received will be close to enough to cover the repayments. Once the property is paid off, further rental income, as well as the growth in value of the property, or the equity, will be yours to use in retirement.

Originally published as Using super to buy an investment property is a minefield