How much do you need to buy property in super?
For a while there, it seemed like just about every investor you’d speak to was tapping into their superannuation nest eggs to buy real estate.
Seven or eight years ago, as major property markets in Sydney and Melbourne began their last boom cycles, there were four letters on everybody’s lips – SMSF.
Self-managed super funds were all the rage, letting you do your own thing and put some of your savings towards a property investment.
Over the past few years, the sharp drop-off in interest in this type of investing had some wondering if the SMSF craze was just a brief fad.
But now that markets are revving back to life, especially in Sydney and Melbourne, attention has turned to using super to invest in real estate once more.
What sort of balance should you have before you consider it?
It’s a common question I’m asked, but the answer isn’t always what people want to hear.
Avoid one egg, one basket
It goes without saying that your super is critically important.
It’s the nest egg you’ve built over a long working life that’s meant to be there to fund your remaining years of life.
If you wrap up work at 70, that could be another two decades of living you’ve got ahead of you!
Not having enough is a real concern for a number of Australians.
It’s a valid worry – the cost of living is only increasing, so you want to guarantee the quality of life in your golden years.
That’s why putting all of your eggs in one basket is an unwise move.
A sure-fire way of doing this is by maxing out your super to fund the purchase of an investment property.
Property is a great vehicle to build wealth.
We’ve seen that for decades now.
Demand for somewhere to live is booming thanks to Australia’s growing population and the shortage of supply.
That’s going to continue well into the future.
But trying to jump on a bandwagon that you can’t really afford right now puts you and your future stability at serious risk.
That’s why I recommend that my clients have at least $300,000 in their super fund right now before they consider going down the SMSF route.
When I tell some people this, they sometimes baulk at the figure. They’ve done some rough sums on the back of a napkin and reckon they can do it for around $200,000. That’ll fund a deposit on a budget buy and the costs, and they’ll have enough leftover, topped up with their employer’s contributions, to pay the loan.
Sure, that might be true, but what if it all went wrong?
Mistakes are costly
Let’s say you use an SMSF to buy an investment property worth $500,000. You’ll stump up the deposit of $100,000 from your balance, plus a couple of thousand for costs, and then around $25,000 in stamp duty.
The deposit is a down payment on the property’s equity, so put that to the side. And with a solid long-term investment, the stamp duty and other costs over 30 years are pretty nominal in the grand scheme of things.
But let’s say you realise in three years’ time that you’ve made a terrible choice. The investment is an absolute dud and it’s unlikely to ever appreciate significantly in value or return cash flow worth crowing about.
You’ve got to cut your losses now, recoup your initial purchase price and deposit, and get out of there.
Needless to say, you’re not getting that stamp duty and other costs back.
So, let’s call it $30,000 neat.
If you earn around $100,000 a year, that’s three whole years of your employer’s super contributions.
That’s a pretty hefty loss of coin for an unwise decision.
There’s the lost opportunity of the bad investment – the three years that you could’ve had an asset appreciating in value and income.
There’s the lost return from those three years.
There’s the drain on your savings by servicing the loan.
And there’s the wiped-out contributions for the next three years from being in the red.
All in all, you’ve paid stamp duty on the way in and a fool’s tax on the way out.
It’s why you don’t want to compromise on the quality of the investment and wind up with a lemon that eats away at your retirement savings.
Set and forget
The ideal scenario for your super fund investment is one where you can buy high-quality assets that fit your circumstances and strategy, and then leave them.
A property that has solid growth fundamentals and will appreciate in value, and perhaps one that delivers good cash flow now, or in the future, should be able to sit in your investment portfolio forever.
Starting an SMSF to buy property as an investment towards your golden years is a worthy idea.
It works for a number of people.
We’ll help to settle two of these purchases this month, I did two last month, and there’s another three or four on the books next month.
For investors with a healthy super balance who buy well and think strategically, tapping into your super nest egg now for the benefit of your future can work.
But buying anything you can because you’re restricted by budget due to a low super fund balance doesn’t many any sense.
You might as well take that money now and burn it.
There’s far too much at stake – possibly 20 years of your life – to gamble irresponsibly, especially when superannuation’s whole purpose is to set you up for your latter years of life.
So please don’t gamble with your super, if the time isn’t right then doing nothing is the right thing to do.
But just the same, if you do have a healthy super balance and property investment is high on your agenda, it can be a great way to leverage into a property that will exponentially grow your wealth and therefore the rewards are well worth it.
Superannuation is a highly regulated entity and before doing anything, everyone should seek the appropriate advice.
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The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.