What you should know when buying a property through super
Buying an investment property with your super is becoming a popular investment strategy. If you’re searching for it on the internet, you’ll likely be bombarded with every service, idea and success story under the sun.
There are two different ways of buying a property with your super fund. Both methods require that you set up a Self-Managed Superannuation Fund. The easiest way is to have sufficient money to buy the property outright. The alternative method is to borrow money to buy the property. For the latter you’ll need at least a 30% deposit and a more complex superannuation structure called a Bare Trust (or custodial trust). There is a legislated method of how to do this so it’s best to have a financial planner to guide you through the process.
Buying a property in your super is very similar to buying a property in your own name in that you have to consider what you can afford, the time frame you have available, your comfort with long term investments and the potential risks that come from being an investment property owner. However there are a few extra things that you need to consider that we share below.
Don’t skimp on structure
A Self-Managed Superannuation Fund can be a complex beast requiring a lot of paperwork. The quality of your documentation will influence how well your fund runs, so it’s worth investing in the set up, accounting, auditing and administration of your fund.
Pick the right property
This might seem obvious, but you’re investing your superannuation for profit, not to make you feel good. Don’t buy a property based on where you live and your personal preferences. Buy on where you’re going to get profit with a level of risk that you feel comfortable with.
Triple check your cash flow
You super fund’s income is made up of the contributions that you’re putting in so make sure that you’re getting sufficient yield on your property to make it work. A waterfront property may be a unique prospect, but if the yield is too low, your super is going to run out of money. Borrowing in super is also more expensive, so this just exasperates the issue.
If you retire and you’ve got lots of property, you have to pull out at least 4% of your fund balance as a pension. If you’re overall net yield is below this, you’re going to run out of money and be forced to sell a property to maintain compliance in your fund. Ensure that you have sufficient cash and/ or other assets to meet your pension needs and avoid being forced to sell below expectations.
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