One of the best things about controlling your own self-managed super fund is the freedom to choose how your money is invested. You have the option of diversifying your investment portfolio to include a range of assets, including cash, shares, managed funds. Of course, there’s also the option of SMSF property investment.
Is SMSF Property Investment Right for You?
The main benefit for buying an investment property in your SMSF is receiving rental income. Your tenant pays rent while living in the property, but that rental income is paid into your self-managed super fund. You’re adding a new source of contributions into the fund on top of the amounts your employer pays.
Effectively, you’re increasing the amount of contributions being paid into your SMSF. You still have your employer paying your 9.5% Super Guarantee contributions into the fund, but your tenant is also contributing rent payments as well.
If your SMSF balance isn’t high enough to purchase an investment property outright, you do have the option of borrowing money from a lender to cover your costs. You use some of the money available in your SMSF as a deposit. The rest comes from the loan.
The loan payments could be covered by the rental income you receive, plus the 9.5% Super Guarantee contribution amount from your employer. If your spouse is also a member of your SMSF, you have the contributions from your spouse’s employer going into the fund as well.
Leveraging your Super
Buying an investment property in your self-managed super fund gives you the opportunity to leverage the money you have in the fund to buy assets you otherwise might not have been able to afford.
For example, you might have a $250,000 balance in your SMSF, which may not be enough on its own to purchase an investment property. However, by leveraging your super balance with a limited recourse loan, you increase the amount of money you have available to purchase new assets.
Let’s assume you only use $200,000 as a deposit for your property purchase and you borrow the remaining $200,000 to complete the purchase. There will also be other costs associated with the purchase, such as paying stamp duty on the purchase.
The property receives $380 per week in rent, which is a total of $19,760 per year before costs. The repayments on your $200,000 SMSF loan are $1,195.25 per month, which is a repayment of $14,343 per year*.
For the purpose of this example, we’ll also assume that your employer is paying $9,500 per year into your self-managed super fund. Your spouse’s employer is also paying $7,500 per year into your SMSF.
Instead of relying solely on your employer’s contributions to top up your super, you now have an additional income stream going into your self-managed super fund – the rental income.
If you paid all your super contributions off your loan each month, it’s possible to pay off the property in under 10 years**. The loan payments stop, but the rental income continues while you still own that property.
The value of the assets within your self-managed super fund is also dramatically increased over that time, due to choosing SMSF property investment as a strategy for your fund.
SMSF property investment can be a great option for many people. However, it’s important to seek professional advice before making a decision for your own retirement strategy.
*Calculated on a loan amount of $200,000 at 5.97% using principal & interest payments over a 30 year loan term.
**Additional repayments paid into loan take into account 8.8% property management fees deducted off the gross rental income received for calculations to determine accelerated repayment term.