How you invest your super can make a large difference to the size of your nest egg.
Generations of Australians have had a love affair with property. So, it’s hardly surprising investing in property through a self-managed super fund (SMSF) is increasingly popular.
While using superannuation to buy property has been happening for decades, it has really come into play as a compelling investment option since 2007, when SMSF trustees were officially allowed to borrow to buy assets.
Here are five good reasons to include property in your SMSF:
1. It’s a proven source of wealth
According to the BRW Rich 200 list, property has consistently been the major source of wealth of the country’s multi-millionaires.
Property investment is also said to be less of a risk, with far less fluctuation in the property market and cycles that tend to take longer. In fact, in the past 50 years, you would have trouble finding a period when real estate prices fell more than 10 per cent.
Real estate also enables investors to leverage 80 per cent of its value to acquire more property as part of an investment portfolio.
Unlike shares, property values move up and down slowly. On top of this, shares expose investors to the risk of losing everything in the case of a company going into liquidation.
Real estate also provides investors a raft of legal tax deductions.
2. It provides stability
While investing in the stock market can be fraught with risk, investing in property tends to offer stability.
Jonathan Scholes, a partner with financial planner Findex, says secure property assets can help retirees sustain the lifestyle they want.
‘The right secure property as an asset in retirement can provide relatively stable value, and a solid and reliable income,’ he explains. ‘There’s also the potential for the underlying value of the property to grow.’
3. You can see it
There are a growing number of intangible investments on the market. But nothing beats investing in good old-fashioned bricks and mortar – a tangible asset that gives you a physical representation of your investments, and one which can increase in value.
Even experienced investors feel more comfortable making a significant financial commitment when they have something physical to show for it, as opposed to a piece of paper, when investing in equity.
Sydney financial adviser Brenton Tong agrees. ‘Glossy brochures and slick websites showing happily retired couples may give you a sense of security, but if you can’t explain where your money is invested and what it’s being used for, you should move onto something else.’
4. You can invest anywhere
Property can play an integral role in a diversified investment portfolio. And best of all, you can invest absolutely anywhere.
When deciding where to invest, consider how much risk you’re willing to take. There’s no denying that property carries far lower risks than other investment options.
‘Residential property can still give returns over 5 per cent, depending on where you buy,’ says Tong. ‘Just don’t fall into the trap of buying the house down the street because you understand the area. Just because it’s where you choose to live, doesn’t make it the best performing suburb to invest into.’
Instead, make sure you cast the net wide and look for investment options that suit your budget in promising areas. Also consider buying well-built residential properties that suit a range of renters.
5. The rules are in your favour
If you’re looking to buy an investment property through your super but are short on funds, there is another approach. A Tenants in Common (TIC) arrangement allows you to split the borrowing to purchase property across your family home and your super fund, if you are buying with somebody else.
For example, if the property you want to purchase is $400,000 with a TIC, you could borrow $200,000 against your family home and use $200,000 from your super fund.
Ultimately, the decision comes down to making a rational investment decision based on facts and professional advice from a qualified third party.