Blog

Investing in real estate - using your superannuation

Published on Topic:
Untitled-3-01.png
Should Labor win the next election only those who pay cash with their super will be able to buy real estate in a SMSF. N.B. As of 24/9/18, Sportsbet odds are $1.30 for a Labor win and $3.20 for the Coalition to win.

If your see benefit in a strategy to leverage your super act while you still can.

It is assumed this window of opportunity will close within months! To discuss further and/or discover your financial eligibility to purchase real estate in super, Click Here

Compulsory Super Rising to 12%

As Australians, our superannuation (super) is a pretty simple process. Compulsory contributions are made by your employer, equal to 9.5% of your salary. This amount will incrementally increase from 2021/2022 until it reaches 12% in 2015. Individuals have the option of adding more to their super via salary sacrificing and/or after tax contributions.


Most people have their super with either a retail or industry fund, whose fund managers invest those monies on their behalf. Investments are usually in shares and are accessible when you retire. Your super balance at the end of your working life plays a big role in determining your quality of life in retirement.

While people’s retirement dreams differ, what doesn’t is the desire to at least maintain our pre retirement lifestyles. True financial freedom means never having to work to supplement your earnings.

For Most, Super Will Not Be Enough

But, what if your super is not on-track to delivering you this basic ‘dream’ on the other side of your working years?

A limitation with traditional retail and industry superannuation schemes is the inability to leverage the funds inside them. Only inside a Self Managed Superannuation Fund (SMSF) can your balance become a deposit, from which you borrow more.

Future returns are no longer a percentage of what you started with but of the value of the assets your fund now holds.

As leveraging can work for or against you, by multiplying either gains or losses, it’s best not to borrow for speculative investments. No matter how much upside an investment potentially offers, it’s important to look at worst case scenarios.

It’s said that saving to fund your retirement is likely to to deliver as much success as saving to pay cash for a home will. In reality it’s probably easier to save and pay cash for the home!

In the same way as we use a small deposit to buy the home we live in, today many are doing the same with their super. Rolling what they have in super over to a SMSF, they borrow to buy real estate that the SMSF will own.

Whether the return is 4%, 8% or whatever, it is on the value of the whole asset, not the smaller deposit used to invest into that asset.

Borrowing to Leverage in a SMSF

SMSFs can borrow to a maximum of 80% LVR (loan to value ratio) when investing into real estate.

Many Australians have opted for taking control; they want to decide on and implement their preferred investment strategy. It’s their hard-earned retirement savings and they feel they can do more with it by setting up a SMSF to day trade, buy precious metals or crypto currency, or borrowing to invest into real estate. Of course these are just some of the options available.

Safely and responsibly using the right kind of debt to multiply the little you have can help make your goal of financial independence a reality.

Of course, as with any form of investment, seeking professional advice to make wise decisions is always advisable - we don’t know what we don’t know.

Aside from residential real estate, you will be hard pressed to find another investment asset class that allows you to leverage up to 80% of its value.

Using $200,000 in a SMSF to leverage into a $500,000 house and land package means the fund receives the growth of the entire asset. The same $200,000 in a retail or industry fund means the fund receives growth on the $200,000.

Another reason why investing in real estate with one’s super is popular is the security of knowing you are investing into the one asset class not dominated by investors. Residential real estate, unlike every other asset class, is dominated by homeowners.

According to the BRW Rich 200 list, real estate has consistently been the major source of wealth for Australia’s multi-millionaires. If you want your super to have a piece of the ‘real estate pie’, the opportunity to jump in starts with education. It’s important to understand not just ‘the good’, but also ‘the bad and the ugly’, as the saying goes.

“But I’m not comfortable investing”, you might be thinking.

Compulsory super means you don’t have a choice, a percentage of your income is ‘garnished’ and invested for you. So, the argument isn't whether to participate or not, but rather how your super is invested, the investment strategy followed and who will manage decisions around when to buy and when to sell etc.

Before making any significant investment decision it’s wise to seek knowledge and professional advice.

There are a diversity of super fund options and performances out there and, sadly, most people are clueless about their fund’s performance. I say sadly, because super is said to be Australians’ second most valuable asset, after the family home.

Taking Back Control of your Super

Today, more people are opting for a SMSF to take back control over decisions, such as their preferred investment strategy. These include:

- What to buy
- When to buy
- When to sell
- Invest in real assets, such as precious metals, real estate or perhaps fine art
- Day trade in commodities, currencies or shares etc.

If investing in real estate with your super is of interest to you, you will need to know what’s involved and what your duties and responsibilities are.

The Sole Purpose Test

For example, the ‘sole purpose test’. Put simply, the sole purpose of superannuation is to provide retirement funding, not to add to your lifestyle today.

You cannot use your super to buy a home to live in, it must be an investment property, and one that is not rented to a family member or friend. Transactions must be (what’s referred to as) ‘arms length’.

Before setting up a SMSF have your SMSF borrowing capacity assessed. If that proves to be tight, it’s best to have a finance pre approval done before going to any setup effort or expense.

A SMSF will have a documented investment strategy, agreed to by the member(s). Membership may be for a single individual or for up to a maximum of four people.

There are some restrictions when it comes to SMSF borrowing. For example, most lenders will currently only lend up to 70% of the value of residential real estate. They are also likely to insist on a cash buffer being leftover at settlement. From the close of business on 12th October 2018, none of Australia’s big four banks will lend to SMSFs; currently just one still does. Funding can still be secured through a variety of second tier lenders for now, however, should Labour win the next federal election it will cease completely. Labour has promised that in government it would ban direct borrowing by SMSFs as part of its new housing affordability package.

Setting up and managing a SMSF is not for everyone and professional advice should be sought by anyone uncertain about their desired investment strategy and/or obligations as a SMSF trustee.

Like with any worthwhile endeavour, being coached (mentored) and supported allows you to be the best at whatever it is you are doing. That includes playing a sport, running a business and/or investing.

‘Suddenly’ Becoming Interested in your Super

Interestingly, those who do setup a SMSF to invest their super into real estate tend to ‘suddenly’ become very interested and more engaged in their super. Where previously they may have given little thought to it, rarely knowing their balance and seeing super merely as a ‘retirement bonus’, it becomes a very intentional, important and exciting part of their overall wealth building strategy. They tend to stay very engaged with everything to do with their super, knowing exactly what their financial position is at all times.

Whether or not leveraging into real estate with your super is right for you is not the central thought here. What it is is being intentional about the decisions you make and this first requires you having right knowledge and understanding.

Don’t wait until you’re a handful of years away from retiring before seeking out the understanding you need to make such investment decisions because, no matter how exciting other investment strategies may be, you will have left your run too late.

Starting planning as early as is possible to set yourself up to live the Australian dream!