Superannuation is there for us when we retire. It’s the longest-term goal an investor can have. Given the decades-long time horizon of residential real estate, it is no wonder that many invest in property in super. The price increases of property all over Australia have created wealth for many through their primary place of residence. Why not extend the strong returns to your retirement nest egg as well?
There are nuances to investing in real estate through your super. There is a litany of costs and benefits to consider, as well as risks that need to be weighed. Investors or potential investors need to be aware of the common pitfalls and risks.
Concentration risk
According to the Australian Bureau of Statistics (ABS), the average house price in Australia is $959,300. The average super balance is $190,716 for men, and $142,037 for women (aged 45-49, full list available here). Of course, property within super works like it does outside of super and you can purchase a property with a deposit. Still, the deposit for a property will likely be a large chunk of your retirement savings.
This is not just putting all your eggs in one asset class, but it is in one asset. You need to be sure that you are confident about the investment prospects of this asset and that you understand risks.
Part of this is understanding that there may need to be an exit strategy for the asset. Unlike other investments like equities, you can’t just sell the kitchen to fund some new tyres or a holiday. At some point in your retirement (or before), you will have to sell the asset to access the capital. This isn’t always a risk, but it will form a meaningful part of your investment strategy.
Real estate is just like any other asset
Real estate is just like any other asset and there is the potential that your investment will depreciate in price regardless of what the media and property worshippers will tell you. This is especially true if you do not purchase an investment property in the mindset that it is an investment, and not a place for you to live.
Just like any other asset, there are times where it may not be doing well or providing consistent cashflows. You may have an untenanted property due to unforeseen circumstances; you might have unexpected repairs.
Part of the reason why investment properties have been such a good investment in the past is due to tax policy. Capital gains discounts and negative gearing have provided a significant boost to returns and made these investments attractive to investors in higher tax brackets. These policies are not guaranteed. As part of the risk assessment, understand what would happen to the investment if these policies did not exist anymore, and whether it would trigger a forced sale.
We have seen in the past couple of years that higher interest rates can cause investors stress. It has a direct and major impact on your investment returns if you are on a variable-rate loan. There is a cost to the leverage that you take on in your investment and it could lead to poor investment returns or a distressed sale.
SMSFs cost money to run
Purchasing residential property through your superannuation requires you to have a Self-Managed Super Fund (SMSF). Your superannuation balance has to make sense to open an SMSF as there are multiple fees, including flat fees, that may significantly detract from your fund performance.
Tax implications
Some factors below that should be front of mind for investors that have, or are considering, an investment property within super.
Investing in property through your superannuation can be a powerful strategy for wealth creation, but it’s essential to carefully weigh the costs, risks, and long-term impacts. Our Senior Financial Advisor, David Collins can help you navigate the complexities of SMSFs, tax implications, and the nuances of property investment. If you’re considering property as part of your super, book a time with one of our advisers or contact David directly by clicking the button below.
