Can I use my super to buy an investment property

Want to know if you can use your superannuation to buy an investment property? The short answer is yes, however you can only do so through a self-managed super fund (SMSF) and under strict conditions set by the Australian Taxation Office (ATO). 

Currently, over 1.24 million Aussies are members of a self-managed super fund and collectively, those funds hold an estimated $1.06 trillion in local and overseas assets. However, only $61 billion has been acquired in residential bricks-and-mortar, while commercial property assets add up to $117 billion.

So, while it's possible to invest in property using your retirement savings, in reality, very few people do.

Before we go any further, please note that none of the information in this article should be taken as financial advice. Always be sure to consult a qualified financial advisor before making any decisions regarding your SMSF. 

What are the rules for buying investment property with super?

While the majority of Aussies who run SMSFs are choosing not to buy a residential or commercial investment property with their super, if this is something you are interested in doing, there are three specific rules your property investment must comply with.

1. It should satisfy the 'sole purpose test', which requires it to provide retirement benefits solely to fund members.
2. The property can’t be bought from, sold to, or rented to any members of the super fund or any of their business partners or relatives. Rules around commercial property are slightly different, but still require an arm’s length arrangement.
3. Fund members or persons related to them are not permitted to live in it, and anyone who rents the property must pay the market rate – no mates’ rates allowed.

It’s best to speak to a qualified financial adviser or tax accountant to clarify these details further based on your own situation.

How does buying property with super work?

If the property you want to buy with your super satisfies these three criteria, and you have consulted with a financial advisor, there are three ways you can complete a purchase.

You can either do it through a Self-Managed Superannuation Fund (SMSF), the First Home Super Saver (FHSS) Scheme, or by purchasing a home after reaching your preservation age (the minimum age you can access your super).

As mentioned, you can buy an investment property through your SMSF as long as it meets strict ATO rules.

Alternatively, the First Home Super Saver (FHSS) Scheme allows buyers to withdraw voluntary super contributions for a house deposit, but only if they are purchasing their first home.

The third option is to wait until you reach your preservation age, at which point you can access your superannuation and buy a home to live in.

Each method has different benefits, risks, and tax implications. So, it is worth seeking professional advice, warnings, and suggestions from an accountant to understand them better.

How to use super for investing in property

Above, we’ve briefly mentioned the different ways you can use your super to buy an investment property. However, in this section, we will provide more detailed information.

1. Buying with an SMSF

SMSF is a private superannuation self-managed fund that gives individuals more control over their retirement savings.

Unlike retail or industry super funds, SMSF trustees make all investment decisions. However, they also bear the legal responsibilities for compliance. Managing an SMSF can be complex and costly and requires you to strictly adhere to ATO rules and regulations.

When it comes to buying an investment property with an SMSF, there are two main avenues available to you. You can either: buy an investment property outright, or use your super for the deposit and borrow the rest through your fund using a limited recourse borrowing arrangement (LRBA). This option adds quite a sizable dose of complexity which we’ll cover below.

Key Rules and Restrictions

As discussed, to be eligible to buy an investment property with your SMSF, you need to ensure the following:

• You pass the sole purpose test
• You, your family, or related parties cannot live in or rent the property (unless it is for commercial purposes).
• The purchase price and rent must be at market value.
• Your borrowing to buy a property must be structured correctly through a Limited Recourse Borrowing Arrangement (LRBA).

A self-managed super fund (SMSF) gives you direct control over how your retirement savings are invested. Some of the reasons people set one up include:

• More control: You set the fund’s investment strategy and choose the investments it holds.
• More investment choice: An SMSF can invest in assets that may not be available through retail or industry super funds, such as business premises for your own small business, or residential investment property.
• More flexibility: An SMSF can have up to six members, so you can pool your super with family and make decisions together.

SMSFs also come with responsibilities. As a trustee, you’re legally responsible for making sure the fund complies with super and tax laws, and penalties can apply if it doesn’t. There are also ongoing costs, including an independent audit every year.

For these reasons, an SMSF generally suits people with a sufficient super balance, a clear reason to invest in assets that only an SMSF allows, and support from professionals such as an accountant or licensed financial adviser.

Setting Up an SMSF

If you want to purchase an investment property through an SMSF, there are a few things you will have to do to set it up. They include:

1. Establish and register the SMSF with the ATO.

2. Create an investment strategy that incorporates property.

3. Open a separate bank account for the SMSF.

4. Make sure you are compliant with SMSF regulations.

Limited Recourse Borrowing Arrangements (LRBAs)

An LRBA is an initiative that enables an SMSF trustee to take out a loan from a third-party lender. The trustee can then use those funds to purchase a single asset (or multiple identical assets of the same market value), which is to be held in a separate trust.

Again, there are some restrictions. For instance, the property cannot be significantly renovated using borrowed funds, and the borrowing must only be for that acquirable asset.

The costs can also be more expensive than when purchasing regular property as the fees for the following may be higher:

• Loan establishment
• Legal fees
• Financial advice fees
• Compliance with ATO fees

In addition, there are several risks and restrictions associated with buying property with an SMSF, such as:

• Market fluctuations, and in particular, declining property values, might impact retirement savings.
• Cash flow challenges like loan repayments being met without relying on personal funds.
• Non-compliance with SMSF rules can result in penalties.
• Property is an illiquid asset, which means it is harder to sell quickly if you need to do that.
• You can’t alter the property in a way that changes its character until the loan is fully repaid.
• SMSF borrowers can face higher interest rates and lenders may be unwilling to finance the full purchase price.
• Losses from the property can’t be offset against taxable income outside the fund.

For many investors, that last one can be difficult to stomach. Several of these issues can be alleviated by purchasing the property outright, thus avoiding the need to borrow from banks, and allowing for greater freedoms when it comes to property renovations.

2. Buying with the FHSS scheme

The First Home Super Saver (FHSS) Scheme was introduced to help first home buyers save for a deposit within their super funds. It allows you to make either concessional (before-tax) or non-concessional (after-tax) voluntary contributions to your fund that you can later withdraw a portion of to put towards your first home.

This scheme isn’t explicitly for investment properties per se, as it needs to be for your first home and you are required to live in it for six out of the first twelve months. It’s also not so much a case of buying a house with super, but of saving through super for a bigger deposit, faster.

It's the tax concessions that are your friends here. Contributions made to your super fund are taxed at the rate of 15%, which is likely to be lower than the marginal rate you are paying on your normal income. The difference between the two equates to more money for your deposit.

Eligible first-home buyers can withdraw up to $50,000 of voluntary contributions for a property deposit, although no more than $15,000 per year ^[3]. But it’s worth noting that this applies to individuals, so a couple hoping to buy their first home can each apply for the scheme and theoretically save up to $100,000 in voluntary contributions over a two-year period. 

A detail that can trip people up is that the FHSS only works with voluntary contributions to your super fund (e.g., spouse contributions and compulsory employer Super Guarantee cannot be used).

This next part is important: you can only access your super funds under the FHSS once, and you must make sure that you make the request and receive a determination from the Australian Tax Office before you sign any purchase contracts or apply for your super to be released.

So, to be eligible, you must:

• Be a first-home buyer.
• Be over 18.
• Intend to live in the property (initially at least).
• Get a determination from the ATO.

3. Buying a house once reaching the preservation age

From age 60, you’re able to access your super – if you retire or leave a job. There are also options to allow access to some of your super while you’re still working. Everyone over 65 can access their super^[4]. 

Once you reach your preservation age, you can access your super and use it for any purpose, including buying property.

While it is less commonly used for investment purposes, it does allow retirees to purchase a property outright or use their super for a deposit on an investment.

However, funds withdrawn from super are subject to tax depending on the withdrawal method. At the same time, investment properties purchased through super you have accessed may impact your eligibility for the age pension.

What are the costs involved?

The total costs involved in buying an investment property through your superannuation depend on the purchase method you choose.

For instance, when using an SMSF, there are setup fees, legal fees, and ongoing compliance costs you will have to factor in, along with costs for professional investment advice, such as that from an accountant.

Congruently, stamp duty applies to all property purchases, while loan costs will also come into the reckoning if you are borrowing through an LRBA.

Some other costs that might accrue include:

• Property management fees if you are hiring a professional to manage the investment.
• Strata fees
• Various insurances to protect your assets.
• Legal Fees, which are necessary for property transfers and SMSF structuring.

Each of the three methods carries different financial commitments, so it is good practice to fully understand what they are before proceeding with a purchase.

Pros and cons of buying investment property with super

Like with most things, there are pros and cons to using your super to buy property. Here are some of the main positives and negatives of doing so.

Pros

• You can invest in property even if you are not yet able to access your superannuation or don’t have enough cash saved up for a deposit.
• Should you need to secure a loan to purchase a property, interest payments may be tax-deductible.
• Other possible tax benefits include a capital gains tax discount (once you have owned the property for a minimum of 12 months).

Cons

• The process is quite complex and can take up a lot of your time, and if you make mistakes, you might face hefty fiscal penalties.
• Using a significant portion of your super to purchase the property is risky because if its value falls, it could impact your savings.
• It can cost you more money to secure an investment property via an SMSF, particularly if an LRBA is involved.

What are some additional things to consider before buying?

Before you go ahead and use your super to buy an investment property, there are a few other things you may want to consider.

One of the main ones is how important it is to you to have a diverse portfolio of assets because relying too heavily on property can expose you to market risks, cash flow challenges, and limited liquidity. All these factors may impact the wealth you generate for your retirement savings.

It is also worth seeking professional recommendations before making any investment decisions. For instance, financial advisers can help assess whether property investment is the right fit for your retirement goals. At the same time, accountants can provide guidance on tax and compliance, and lawyers can advise on the property settlement and legal processes.

These professionals are professionals for a reason. So, it is worth engaging their services to better understand the risks and benefits of using your super to purchase an investment property.

Summing up

The decision to purchase property with your superannuation is something you’ll have to come up with yourself. However, just because many people are not doing it may not be the best reason why you choose not to do it as well.

Instead, whatever decision you make, it is worth weighing up the pros and cons of doing so after seeking professional advice.

If you decide you do want to purchase a property, then that is where we can help. Our expert team of residential estate agents know the local market like the back of their hands.

Contact them today to kickstart your search.

Frequently asked questions

Here are some answers to questions we are regularly asked about the purchase of commercial or residential property through a superannuation fund.

Can I use my SMSF to buy a residential property for personal use?

Unfortunately, no. SMSF property investment must comply with the Sole Purpose Test, which means the property cannot be used by you, your family, or related parties.

Instead, the property must be solely for generating retirement benefits.

How does the property market affect SMSF property investment?

Market conditions can impact property value and rental income, which can influence the performance of SMSFs and property investments.

For this reason, it is advisable for trustees to thoroughly assess risk tolerance and consider diversification before committing to any purchases.

Should I seek professional advice before using my super to buy an investment property?

It is always a good idea to engage a financial planner, SMSF accountant, or private wealth advisor before using your SMSF to buy an investment property.

They will help you to ensure your investment strategies are suitable for your objectives financial goals and comply with regulations.