Did you know your superannuation could be used to purchase real estate investment properties through a self-managed super fund (SMSF)?

For most Australians, superannuation is a relatively simple process. You or your employer make regular contributions into an industry superannuation fund and that money is then invested on your behalf (usually into shares). By the time you reach retirement, your super balance has grown significantly to allow you to live comfortably for the following years.

There are a number of Australian super investment options, and many more people are taking control of their own superannuation by opening a SMSF. This gives them the ability to decide for themselves when and where their super will be invested.

Here’s what you need to know if you’re interested in buying property with your super.

Using Super to Invest in Property: The Basics

Whilst you’re unable to access your superannuation to buy yourself a house to live in, you’re able to use it to buy investment properties. You may do this through your SMSF which can have between 1 and 4 members, allowing members (trustees) collectively make decisions about how their super is invested. The trustees are also required to have a documented investment strategy, which is simply a detailed financial plan based on the current and future needs of each member of the fund.

This could still mean investing in shares, of course, although with property markets experiencing stunning growth over the last decade, many people have instead included property as part of their investment strategy and retirement plans.

It is strongly advised that you seek professional financial advice to understand your responsibilities and set up the fund correctly as it is a highly regulated process.

Leverage and borrow

You don’t need to have saved up the full value of the investment property to buy with your superannuation. Michael Yardnet, Metropole property strategists CEO, says you can use your super as leverage to secure a loan to buy that investment property.

“If you had $300,000 balance in your super, you could own $300,000 worth of a managed fund or bhp shares, or you could use $200,000 of that money as a deposit and borrow another $400,000 to buy a $600,000 apartment,” he says.

The rules around borrowing

Yardney explains that the restrictions on borrowing through your SMSF are “quite strict”. Firstly, you’re unable to use all of your superannuation in order to buy an investment property.

“You’ve got to leave some behind as a buffer. The banks are more careful so they’re only going to lend you a lower loan-to-value ratio.” Banks will currently only allow you to borrow up to 70% of the property’s value and won’t let you take out lenders mortgage insurance in order to increase that amount.
You are also required to keep a ‘liquidity buffer’ worth 10% of the proposed investment’s value in your SMSF (cash and shares).

Get professional advice

Just as you should seek professional advice before any major financial decision, it is strongly recommended you seek advice and ensure you fully understand how your fund will operate and how you’re able to access your super. Yardney says, “It’s got to be an appropriately qualified financial planner because super is a financial product.”

Read more: Realestate.com