How to buy a property with your superannuation

The Australian love affair with residential property is far from over and with good reason. Between a housing shortage and rental crisis, along with structural supports like negative gearing to attract investors, Australian residential property has offered extraordinary growth. Even factoring falls in the last year or so, national prices increased by 83% over the last decade according to PropTrack.

However, this growth doesn’t spell affordability, particularly in a time of above-target inflation and rising interest rates. Even factoring a much welcomed pause from the RBA in July is hardly likely to change that status quo.

So what’s an investor (or desperate home-buyer) to do in this environment should they not have the cash readily on hand? Could they tap into Australia’s $3.5 trillion superannuation industry for property?

The answer is yes – but with considerable caveats.

I spoke to Bryan Ashenden, head of financial literacy & advocacy for BT Financial Group, to find out more on the finer details of buying property in super, along with the alternatives.

The different ways you can buy direct property in your superannuation

There are a few options for property and super, though Ashenden points out the options to directly purchase property are limited and only apply to specific audiences.

The two options for you to withdraw money from super to buy a property.

Option 1 is for first-home buyers and is known as the First home super saver scheme. It allows first home buyers to make voluntary concessional and non-concessional contributions into their superannuation up to a total of $50,000 across multiple financial years to use as part of a deposit for a home to live in.

If you go down this path, it's worth considering how you can 'top-up' your superannuation down the track to avoid any long-term impact to your retirement savings. Ashenden also notes that others (like parents and grandparents) can contribute to your superannuation as part of this scheme to help your first home buying plans.

Option 2 applies to retirees.

“When retirees have managed to get access to their super and they are looking to purchase personally, it’s a matter of ‘I have access to my super, I can draw some of it down and then I can invest in property if that’s what I want to do now’,” says Ashenden.

But these options are not the end. You can buy a property IN your superannuation. The details get a bit more complicated from here though.

Using superannuation to buy an investment property

If you want to buy a property in your superannuation, the first thing to know if that you’ll probably need to set up a self-managed super fund (SMSF) and this comes down to the trustee set up on superannuation funds. Retail super funds aren’t prevented under law from members purchasing direct property but are unlikely to let you go ahead.

“Trustees need to make an assessment about what they think are the right investments to be available to members of their fund and that’s typically listed options. 

The trustee is responsible for the investments. Will the trustee go off and do their investigation around a particular property that a member might want to purchase? Realistically, no. 

If something goes wrong, that trustee would be on the hook so they aren’t going to enter a borrowing arrangement and create other risks that might flow off to other members of the superannuation fund,” says Ashenden.

SMSFs can have up to six members, so this creates the option for funding an investment to be spread across members.

The matter of funding is also important.

If the SMSF doesn’t have the funds to purchase the property outright (i.e. only a deposit), then it will need to borrow money and the SMSF is ‘on the hook’ for repayments. This might require members to make additional contributions (within limits) to ensure there is enough money in the fund for repayments.

Even if a member ‘loans’ the additional funds to the SMSF, repayments from the SMSF need to be set up in a formalised arrangement with market rates – no discounted interest rates here!

Bryan also notes that interest rates for loans to SMSFs can be higher because there’s limited recourse and deposit requirements are also typically higher.

The key criteria for property in superannuation

If you are looking at your superannuation balance and seeing the potential for that little holiday apartment you’ve been eyeing off or your dream home to live in, hold fire. Any property purchased in superannuation needs to adhere to strict rules – you can find out more here.

In short, the property must:

• meet the 'sole purpose test' of solely providing retirement benefits to fund members
• not be acquired from a related party of a member
• not be lived in by a fund member or any fund members' related parties
• not be rented by a fund member or any fund members' related parties

“When you purchase property in a self-managed super fund, you’ve got to be conscious of the related party rules, which means you can’t get an advantage out of the assets you have in the fund before retirement. You can’t live in it so you can’t use your SMSF to buy the property you want to live it and your relatives can’t either. If it’s a residential party, you can only rent it out to an independent third party through normal market arrangement,” Ashenden says.

While Airbnb may seem like a good option for using and making money off the property, Ashenden suggests it’s probably out too.

“You’re not meant to be leasing it from yourself so I’d say it’s a no for people who think it’s going to be a holiday place and you can just stay there for a couple of weeks during the year,” he says.

There is one ‘slight’ exception to the rule and that’s for commercial leasing if you wanted to run a business in the property you’ve purchased through an SMSF. It has to be formalised and at market rates though.

“You should think about getting lawyers involved to help draft up the appropriate commercial documents and correct terms and conditions,” Ashenden says.

He also warns that those who lease the property for business purposes need to be careful of any improvements they make to the property too.

“It could potentially be regarded as if you had made a contribution to your super. If the value of that improvement is below your caps, it’s not an issue. If you’ve breached your contribution limits, there are certain penalties that come into play,” he says.

When a property in super is part of the long-term plan…

Let’s say you see your dream property and the hope is that one day, you’ll retire and that will be your home. You’ve taken all the criteria into account, rented it out under market arrangements for many years and finally, the day comes, you’ve retired. What next?

At the end of the day, the rules haven’t changed while the property is in your superannuation but Ashenden says there are some options for bringing the property out of super so you can live in it after retirement.

“You’d have options such as selling your current principal residence and take the proceeds to buy the property out of the SMSF for its market value. It then becomes your primary residence, provides that liquidity you need in retirement for your SMSF and you’ve gotten a large lumpy asset out,” he says.

“The other option is you could have the SMSF transfer the property to you personally as an in-specie benefit but it basically says you’re taking a lump sum out of your superannuation fund and there would be tax applicable.”

In essence, buying a property in your super is not for the faint hearted. It’s highly complicated and you still need to consider things like liquidity in your SMSF and adequate asset diversification, but the option does exist should you choose to take it.

The alternatives to buying direct property in your superannuation

It’s worth remembering direct property ownership is not the only way you can gain exposure in your portfolio – and given the importance of diversification, perhaps thinking more broadly about property investments is worthwhile.

Unlisted managed funds, trusts and ETFs can be one option to consider whereby you might have access to residential, commercial and industrial properties. A starting point for your research might be Livewire’s fund tool here. Select Property – Australian and Property – Global under asset class and the tool will fill the options for you.

Buying direct property outside of superannuation may also be a better option for many.

“I would always recommend you think about getting support from a financial adviser to help you consider whether property is the right option. If property is the answer, are there different ways we could think about exposure to property? Different ways to purchase that property? Could the financial adviser help you come up with a different way to save for property so ultimately you can purchase outside of superannuation?” says Ashenden.

Final things to consider when it comes to superannuation and property

“If you are going to buy property through your SMSF, use experts to guide you. Make sure you understand all the rules, the responsibilities that you have as a trustee and make sure it’s appropriately balanced against any other needs you might have from a retirement perspective as well,” says Ashenden.

Don’t forget the continued need to maintain your property once its purchased too.

“Make sure you have lawyers to go over documentation and ensure you have appropriate lease agreements in place. You are the landlord so make sure you’ve done everything you need to. Get the right insurance in place. Think about who you are renting it to because you want to protect the value of your property,” Ashenden says.

Have you purchased a property through your SMSF? Let us know in the comments some of your key tips to managing your property.