How investing in property through a self-managed super fund can help you retire comfortably

How investing in property through a self-managed super fund can help you retire comfortably
How investing in property through a self-managed super fund can help you retire comfortably

APRA  recently revealed that the Australian superannuation industry lost $18.5 billion of its clients’ money in the last financial year. 

It’s been a tough year for all types of investments, so let’s look at the returns over the longer term. 

They’re not much better. 

Apparently the average rate of return from the superannuation industry over the last 15 years  (between 1997 and June 2012) was 4.9% a year, and this came with a volatility of 8.4%. 

Not a very good return considering that for most of that time you could have invested in government bonds with minimum risk and received a divided of over 5% and the average return from the All Ordinaries accumulation index for the past 15 years has been 7.03% per annum.

Reality Check

A recent Rabobank poll showed that baby boomers are retiring, on average, on about $200,000.  

While most folks don’t know how much they need in retirement, it’s generally accepted by the financial planning world that you need around $1 million in retirement to live comfortably.

By the way, I think you need much, much more!

The way planners see it is that, assuming you live in retirement for 15 years with no extra income, $1 million would give you an annual income of around $65,000.

So you can see retiring on $200,000 simply won’t cut it.

Little wonder that more and more baby boomers are looking at taking control of their financial future and setting up self-managed super funds (SMSF).

What’s are our options?

If these facts teach us anything, it is that it’s up to each of us to become financially fluent and take charge of our future. 

More baby boomers are setting up their own self-managed super funds and taking their destiny in their hands. Many are investing in shares, but more and more are investing in property. As a matter of fact I have a mixture of both in my super fund.

But my personal preference is for property, largely due to the fact that residential real estate has proven itself to be less volatile than shares or managed funds. 

Combining the security of bricks and mortar with the tax office changing superannuation regulations back in 2007 so that people can borrow within their own SMSFs, it is not surprisingly that real estate is becoming an increasingly popular super fund cash cow. 

Fact is more and more Australians are recognising the benefits of property as a strong, stable asset base for their super funds, given its ability to generate excellent returns and capital gains over the long term. 

Now, not only can you borrow up to 70% (and under certain circumstances even up to 80%) of a property’s value to invest within your SMSF, you can also seek extra funds to make improvements on the residential properties in your SMSF (with some conditions of course and with special emphasis on repair and maintenance versus improvements). 

So what are the main advantages and disadvantages of taking this tact when it comes to building your own retirement nest egg? 

The good

  • Control – you have complete control over your SMSF rather than entrusting your future financial wellbeing to a complete stranger, who will take your hard-earned cash and invest it in shares and managed funds that may or may not perform.
  • Tax savings – If you buy and hold the property within your fund until you retire and your super goes into the pension phase, you will be exempt from paying either capital gains tax if you sell the investment, or income tax on any rental income should you decide to hang onto it. Before you retire, any capital gains or rental income generated by your SMSF are taxed at a rate of 15%, or 10% CGT is applicable if you hold onto the property for over a year.
  • You could have a diversified investment portfolio that is not reliant on just one investment vehicle, meaning you will have better financial security for your future. 

The bad

  • The cost – There can be a significant cost in initially setting up your super fund, and the annual compliance costs could be up to a few thousand dollars. But don’t forget the management fees you’re saving by not leaving your money with a fund manager.
  • Higher borrowing costs – Currently there are slightly higher fees involved in borrowing to buy property through your SMSF.
  • The confusion – There’s no denying that managing your own super fund can be a minefield of complicated rules and regulations. Get something wrong and you could end up paying hefty penalties. Of course, you can always pay a professional to manage it on your behalf, and this is something I would advise anyone with an SMSF to do – whether they’re buying real estate or not.
  • The money – You generally need a bigger deposit to buy a property in your super fund than you need to buy one in your personal name. How much you need will also depend on the amount of your super contributions. This is not a strategy for someone with a small amount of cash in their super. 

Be careful

Of course before you go down the route of setting up your own SMSF, it is critical to seek independent advice from a properly qualified financial planner and to ensure you set up things correctly so you don’t fall afoul of the tax man. 

With 5.3 million baby boomers moving transitioning into retirement over the next 15 years or so, I see properties bought in a SMSF as a major driver of property values over the next decade.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.

Community Discussion

Be the first one to comment on this article
What would you like to say about this project?