Many of us dream of the day we can finally quit the rat race and enjoy retirement. Spending your golden years traveling or playing golf with your fellow retired buddies is an achievable goal, as long you have acquired enough retirement funds to make this lifestyle a reality.
For many Australians, the road to retirement is pretty straight forward – either they or their employers make regular contributions into a superannuation fund and the money is invested on their behalf.
However, there is a growing number of Australians who are opting to go off the beaten path by investing their retirement money on a self-managed super fund (SMSF). This type of fund gives members the ability to take control of their investment and decide how and where their money is invested (while abiding to certain rules and regulations, of course)
One of the attractions of SMSFs is that your retirement money can be used to invest in property. The real estate market in Australia has experienced outstanding growth over the past decade, and for this reason, many people have included property as part of their investment strategy and retirement plans.
If you have not yet set up a self managed super fund, see our guide on how to do so here.
Can I use my super to buy an investment property?
The short answer is yes, if you are:
- A trustee of a self-managed super fund (SMSF)
- A trustees of some retail, corporate and industry superannuation funds – always check the fine print and read the specific regulations that apply to your fund. In some cases heavy fines can apply
The basics of buying property with super
If you are a member of a SMSF you can invest directly in property using the funds you’ve accumulated in super. This can include investing in commercial or residential properties such as property developments, individual houses, or even an AirBnb investment (read more about the latter below)
The basic restrictions surrounding SMSF property investments include:
- The property needs to be purchased with the sole intention of providing retirement benefits to the SMSF members.
- The property must not be bought from a related party of any of the SMSF members.
- The property cannot be used as the living quarters of any of the SMSF members or their relatives.
- The property can’t be rented by any of the SMSF members or their relatives.
The SMSF’s members are also required to have a documented investment strategy. This means that you will need to set up a detailed financial plan based on the current and future needs of each trustee of the fund.
Thinking of buying property with your super? Simply answer a few questions and we can send you opportunities tailored to your needs.
Can I use my super to buy an investment property to run as an Airbnb?
Like the idea of running an Airbnb property as part of your investment strategy? Well, the good news is that you could use your SMSF to fund the investment.
However, while there is nothing in superannuation law preventing a SMSF to run a service such as Airbnb, you will need to ensure your investment complies with all the rules and regulations that would apply to any SMSF property.
For example, you will need to have the investment strategy well documented and no-one related to the fund (including family members or associates) can use the property.
Furthermore, if the ATO deems the SMSF to be providing commercial residential accommodation, then this could trigger a GST liability for the SMSF. So make sure you do your homework before going down this path.
To buy an investment property using your SMSF, you don’t need to have the capital to cover the whole purchase price in your fund. You can also get a SMSF loan to buy an investment property, although some restrictions apply.
Most lenders will allow you to borrow only up to 70% of the property value and you are not able to take out lenders mortgage insurance in order to increase that amount.
Furthermore, you are not permitted to use all of your superannuation in order to buy the property. You are required to keep a ‘liquidity buffer’ that is worth 10% of the proposed investment’s value in your SMSF. This can be made out of cash or shares.
Can I use my super to buy an investment property? Yes, you can. Use our borrowing power calculator and get an estimate on how much you can borrow and take the first step towards your real estate investment.
The benefits of buying property with super
If you buy an investment property through a SMSF, the fund will pay a maximum 15 per cent tax on the rental income it receives from the property. Furthermore, if the fund holds a property for longer than 12 months, the SMSF receives a discount on any capital gain it makes upon sale, bringing it to a maximum of 10 per cent.
Once fund members retire and start receiving a pension, the SMSF will not have to pay tax on either rental income or capital gains when the property is sold.
Get professional advice
Planning for retirement is a complex process which shouldn’t be taken lightly. For this reason, it is recommended that you seek professional financial advice.
Think about what you would like to do after you retire – would you like to travel? Volunteer? Write your memoir? Will you downsize or buy a dream home by the beach?
The ideal retirement looks different for everyone. Consider how much money you’ll need to live a comfortable lifestyle after your turn 65 and plan a financial strategy to get you there.