28 Jun 2018

Pros and Cons of Using a Self-Managed Super Fund to Buy Property


In 2017, the Australian superannuation industry was the fourth-largest in the world. Those who decide to manage their super themselves get more control by way of deciding where to invest their money, but have to also comply with tricky tax rules and legal restraints.

Unlike the other fund types, a Self-Managed Super Fund (SMSF) gives you the maximum amount of flexibility with regards to where your retirement savings get invested. When it comes to investing through an SMSF, you have an almost unlimited choice of asset types to choose from. An SMSF truly allows you to take your destiny into your own hands and grow your retirement savings in the way you believe is best for your future.

The law enables Australians to invest in rental property through their self-managed funds with the help of a mortgage. We look at the pros and cons of buying property through an SMSF – is it worth it?

The pros:

Borrow money with your SMSF

While people have been using Self-Managed Super Funds to purchase investment properties for a long time, the difference now is that you can use your SMSF to borrow the money you need to do so. Investments in property fluctuate less than in shares, giving you more control. Though buying outright is far less complex, the option to secure a mortgage means more people are able to invest in property through SMSF.

Superannuation-only tax benefits

  • The SMSF owner won’t need to pay capital gains tax once they’ve retired.
  • Unlike your personal tax rate, which can be as high as 46%, you’ll pay a maximum tax rate of only 15% on rental income after expenses and any capital gains on the disposal of property.
  • Providing the members of the super fund pay money through salary sacrifice, you may be eligible for tax-deductible loan repayments.
  • Investment-related insurance and property depreciation are both tax deductible.
  • Claim further tax deductions on many – if not all – costs related to the purchase, management and sale of the property.

Diversify your investment assets

Your investment property or properties are not recommended to be 100% of your super fund. Diversifying your assets can strengthen your super fund and generate less risk, so this is just another way to spread your asset portfolio across different investment sectors.

Live in the investment property once you retire*

*While you are working, the property is in the name of the fund, and not yourself. However, when you’re retired and you’ve started receiving your super payments, you can sell your own property, and use that money to buy your investment property from your super fund. Then sit back and enjoy your twilight years in your dream property!

The cons:

Property type and usage restrictions

Your SMSF can only be used to buy either an investment or commercial property. It cannot be used to buy yourself or a family member a property, including for personal rental purposes – it must be rented out to tenants outside of your family, so cannot be used to benefit you or your family before retirement.

Property can be complex to sell

Though shares are likely to fluctuate more than property investments, the property takes far longer to sell than shares do, and selling can cost a fair bit too. You might also be stung by the housing market when you want to sell – the value of the property may not have risen.

Cost of purchasing, maintaining and selling an investment property

While an investment property should provide you with a steady monthly income, you may go some time without a tenant. Purchasing a property can result in heavy fees such as stamp duty, and when it’s time to sell, these fees apply again. You’ll also be responsible for maintaining the property over the lifetime of the investment, which will also deduct money from your super fund. Though you can borrow to purchase the property, you cannot borrow to do it up, so you must ensure you have sufficient funds to use as and when needed.

There are clearly many benefits to purchasing an investment property with your SMSF, but we’d advise speaking to an expert lawyer and financial advisor before making any decisions.

Mortgage House

At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.

But don’t worry, we can help with that.

If you’re thinking of buying your first home or investment property through your SMSF, you can contact us for information about the best options for you when it comes to your mortgage.

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