One of our, beautiful, Finance for Mummies AU facebook group members recently posted "I would like to know more about buying a residential property through our super." You will see it was a little hard to answer in one fb post so I have answered here and I hope I have done it justice and provided a helpful response!

Quick answer: Yes, you can purchase residential property from your super. The process is highly regulated and there are rules that exclude you or your relatives from living in the property. You can buy property outright and/or you can borrow funds. You will need a self-managed super fund to purchase residential property with your super. You will likely need a minimum super balance of approx. $250,000+ for it to be viable for you.

It will take time and effort initially and you must follow very specific steps to ensure it is the best option for you and your circumstances.

Using super to buy property is something we hear about often, but for most of us, the process seems out of reach, however it may not be.

I have set out the 5 steps to take towards purchasing a residential property from your super, if this is right for you.

Step 1 Plan Your Retirement

Step 2 Obtain a Statement of Advice from a Financial Advisor

Step 3 Engage a SMSF Specialist for an Investment Strategy

Step 4 Choose a SMSF Lender

Step 5 Purchase the Property

It is really hard to make a complex and dry subject fun and interesting… so I will dive right in and hope that I have at least made the pathway interesting and clear for you, even if I couldn't make it fun!

The best place to start this conversation is to explain what superannuation is and how it works.

Superannuation

Superannuation is a form of retirement income. It has existed long before it became mandatory in 1993 with the Superannuation Guarantee. Most of us will accumulate our superannuation from the contributions that our employers make to our superannuation fund over the life of our employment with them.

The current Superannuation Guarantee that employers are required to pay is 10.5% on top of our ordinary wages or salary.

As superannuation is a form of retirement income planning, it is something that self-employed people also do, so the funds do not just come from employment income, it can also come from us.

When self-employed people make contributions to their superfunds, they are doing so voluntarily and because it is part of good financial planning, not because it is mandatory as with employees.

Employees can top up their own retirement funds by making personal contributions on top of the mandatory employer contributions if they believe that it is in their best interest to do so. There are limitations and tax advantages that must be considered when doing this, which is what makes superannuation planning complex and seem out of reach for most of us.

If you have a headache from this already, don’t worry because superannuation is a highly complex field and because of this, you are wise to use a professional to undertake superannuation planning on your behalf.

As I go through these 5 steps, you will have a better understanding of what you need to do and what you can have a professional do for you.

Step 1 Plan Your Retirement

Only YOU can know what you want to do in your retirement. No one else will know the answer to this.

It is tempting to leave retirement planning to the ‘professionals’, however that is a missed opportunity to get what you want most out of your life and your lifetime earnings.

The earlier you start your retirement planning, the better options you will have to help you achieve your dream retirement.

Take time to carefully consider your answers to these questions:

• What age do you want to retire?
• Where do you want to live? What state, what country?
• How do you want to live? In an apartment, on a property? What are the costs to own and maintain this or what are the costs to rent this?
• Do you want to travel? If so, where to and how often?
• What kind of lifestyle do you want? How much will it cost to maintain that lifestyle? If you have expensive hobbies you want to start or maintain, be sure to count that in.
• What assets do you currently own and do you want to continue to have those in retirement i.e boat, jetski, horses, hobby farm
• Do you have any medical conditions that are costly, or likely to add costs in later years?
• Do you want to financially support or contribute to family before your passing?
• Will you have family close by or will you need to consider aged care? If so, what age will you plan that for? Which aged care facility have you chosen? How much is the facility?
• Do you own your own home now? What is the current market value? Do you have a mortgage?

If you don’t know the exact answers, that’s ok, but at least put an answer you are happy with for now against each question.

I believe that this step is essential for your life. It is a not negotiable in my books. Retirement is not the time to be planning for what you will do next and it is also not the time that you want to find out that you don’t have enough to live how you want to. You have worked hard for all your life to get to retirement – it should be lived as close to YOUR terms as possible.

By relying solely on industry fund calculators to tell you how much you need in retirement you risk not living life on your terms. They do not know you or know the life you want to live, they simply give you estimates based on what they think might be reasonable and I am yet to meet someone that can live off what they currently recommend, which is $45k for a single person and $64k for a couple, and that is assuming you own your home outright.

You might also hear of the 80% rule that some Financial Advisors will recommend, where you should aim to have 80% of your pre-retirement income for retirement but neither of these methods are driven by the dream retirement you want.

So, go for it – plan your dream retirement.

Step 2 Obtain a Statement of Advice from a Financial Advisor

Once you have completed the above, it might be time to engage a Financial Advisor and ask for a Statement of Comprehensive Financial Advice based on your above desires.

If you do not have significant funds and if you are more than 15 years away from your retirement age, you may not be ready to look at your retirement planning in super. Your focus at this time is best spent increasing your income so that you can increase your super contributions. You would also be wise to spend time educating yourself on investing so that you are not reliant on superannuation as your only form of retirement income. If you have very low super funds and are less than 15 years away from your retirement, you would be wise to still seek advice as you need to know what your plan for retirement will be.

The Financial Advisor will look at what age you want to retire and how much money you will need to support the life you have chosen. That will give a figure that you will need to achieve between now and then. They will help you consider the best way to achieve that, in the time you have, with the resources you have. They might also help you tweak your plans to ensure it is achievable.

They will provide that information in a formal Statement of Advice (SoA). As part of the SoA, the Financial Advisor will calculate your current super contributions and make assumptions about your ongoing earnings and the performance of your current superfund to see what it is likely to achieve.

If your current superfund is showing that you will have more than enough to support your future retirement plan and you are happy with the annual returns and fees, one recommendation they are likely to make is that you leave your funds where they are and the advisor can suggest how best to access those funds when you retire.

The age you access your funds may be different to someone else you know, depending on things like when you were born and what your work circumstances are, so it is very important to understand this and seek advice for your particular circumstance.

Retirement Planning is a Financial Advisor’s playground. This is where they operate best, in my opinion.

I prefer to work with independent advisors – this means that they are not selling you a product and receiving a commission for it. Rather they charge a one-off flat fee for the above document ,called a Statement of Advice. You also do not want to lock yourself in to annual reviews. You can simply engage them again in the future for another review when your circumstances change. If your circumstances stay the same, you could look to request a review every 5 years or so.

The cost of a SoA can range from $1100 up to $8000 or more, depending on the complexity of advice, so be sure to get a few quotes first. Most advisors will offer a free consultation and I suggest you attend 2-3 consultations to find the person you feel most at ease with.

Make sure you ask if you can pay for their fees from your superfund. This is how most people prefer to fund super advice, though you can pay upfront yourself, if you prefer.

Step 3 Engage a SMSF Specialist, Lawyer and Accountant

So, let’s say that the SoA provided in Step 2 above, advised you to obtain an Investment Strategy to form a Self Managed Super Fund (SMSF) with the view of achieving a better result by managing your own super fund than you can achieve through your existing fund.

If this is the case, it is likely that the advisor who prepared the SoA can either provide this Investment Strategy advice, has someone in their office who can do it, or will recommend someone to do it. Often Steps 2 and 3 overlap or are completed as one piece of advice, so don’t worry if they are not two distinct processes. Also, you can decide you don’t want advice and just set up an SMSF with your accountant, however I wouldn’t and I wouldn’t suggest that to anyone else, unless they are a seasoned financial professional and have a full understanding of all of the implications. Retirement Planning has so many things to consider that are not part of our everyday life, so, it’s my opinion that specialist advice is well worth it.

Let’s say that the Investment Strategy advises you to purchase residential property as the most appropriate means of investing for your retirement fund, to purchase a residential property, you will need to have a self-managed super fund (SMSF) set up.

Once your SMSF is set up you will roll your funds from your existing industry super fund to your own super fund (your own SMSF will have bank accounts set up as part of the SMSF establishment). You will also need to seek legal and tax advice for this process, which the SMSF professionals will guide you through.

The cost to set up an SMSF is approx. $2500-$4000. The annual cost to maintain this is similar. I have seen lower pricing, however the ATO reports that the median cost for managing an SMSF is $8k per year, so budget for somewhere in the middle.

Because of the high costs of managing a SMSF, some SMSF professionals recommend having a minimum of $400,000 in your super fund. I have also read reports that state that you need at least $500,000 to make a material difference to what you could achieve in an existing fund. On the flipside, I know of SMSF’s set up with as little as $150,000 as the Investment Strategy was able to demonstrate how the SMSF forecast better performance than they could achieve in their current fund.

Either way, the Financial Advisor and the SMSF professionals will guide you with respect to the right investment strategy for you. If that is property, they will let you know the value of the property you can purchase, what your lending options are, what your income and expenses for the property need to be to ensure you are achieving the benefits. They will also guide you with respect to the laws that must be adhered to such as ensuring that the ‘sole purpose’ of the investment is for retirement income.

Don’t forget that your SMSF must have an annual audit. You will want to keep your accountant close at hand to point you in the right direction for complying with tax laws and ensuring your annual audit is also compliant.

Step 4 Choose a SMSF Lender

There are fewer SMSF lenders today than there have been in the past. Of those that are lending, many will still lend up to 90% for residential property.

Borrowing in an SMSF is similar to borrowing for investment property however, the lender will use the income going into your super fund (from your employment or personal contributions) plus the projected income from the property to determine how much the SMSF can afford to borrow and repay.

One of the super lending rules allows only a single contract for property purchases so you cannot buy a house and land package if it has two contracts. You would need to have a single contract for a new build, if that is your intention.

Similar to lending for your own home, there are SMSF lenders (like banks you can go direct to) and SMSF brokers (mortgage brokers that will find the best deal for you), you can use either. Your SMSF specialist will either be able to arrange a lender for you or refer you to a lender.

Without taking this too deep (is it too late for that??), it must be noted that one of the main benefits of purchasing property with your super is so you can leverage debt. That means that you can earn an income and grow the value of your property without having to have the funds up front, also the cost of the debt is tax deductible. With that in mind, it might be recommended to you that you split your super fund balance across multiple property purchases as opposed to a single purchase. It should also be noted that you can not access the equity in a property as the value grows in the same way that you can your own home. This is another reason it might be recommended to you that you do not purchase a property outright with super… however the Statement of Advice is designed to tell you what to do. It will outline the recommended course of action for your circumstances, so don’t worry, you won’t have to think too deeply on this yourself and your advisor is there to tell you what is best for you.

Step 5 Purchase the Property

Once your Investment Strategy, your SMSF and your lending is in place, it’s time to find the right property for your SMSF.

The Investment Strategy will outline the type of property, the net rental yield and forecast growth that you are looking for to help you achieve your planned retirement income.

Here is a list of my top tips for finding growth and cashflow positive residential properties:

• Educate yourself on investing in residential property
• Become an area expert
• Consider areas that are set to grow over the next 5-10 years, even if they are in another state
• Look for new infrastructure spending such as new roads, rail, hospitals, schools, shopping centres
• Purchase off-market
• Purchase under market value
• Purchase a property that you can increase the value through renovations such as adding additional rooms etc.
• Purchase a property with multiple income streams (dual key, granny flat, rooming houses)
• Ensure the gross rental income will cover all costs
• New vs existing is worth considering. New will have high depreciation in early years however often it is priced higher than existing and in newer areas that are yet to be tested. Existing can have more certainty of expected growth but doesn’t have high opportunity for depreciation and will have growing requirement for repairs and maintenance.

When choosing the right property, it is important to run with the numbers that work best, rather than your emotions. You might fall in love with a particular property, but if it doesn’t achieve the returns you need, then purchasing property through your SMSF will be futile and not take you closer to your dream retirement.

Conclusion

Yes, you can purchase residential property from your super fund. The initial stages are time consuming, require effort and seem complex however once you have done it, it will seem easier and the next time will be more straight forward.

Here are some important notes to take away:

• You and/or your family can not live in it or rent it.
• You want to be certain that residential property is the right strategy to take you closer to your dream retirement plan.
• You want to be certain that you will have higher profits from the residential property than you can earn in your existing super fund, considering all risks and efforts involved.
• You might want to consider maintaining a balanced investment portfolio and not putting all your funds into one property.
• You must seek formal advice from a superannuation professional.
• If you establish an SMSF, you will want to give consideration to how your personal insurances such as Death, Total and Permanent Disability and Income Protection will be paid.
• The sooner you start your retirement planning, the more options you will have.

One more note. There are many companies that will do most of the property purchase for you including arranging for SMSF to be set up, arranging lending and sourcing the property. Not all of them have your best interests at heart. If you intend to engage one of these companies, you must thoroughly investigate them first. Your dream retirement depends on it.

Last note. This is not financial advice. This is an opinion piece which includes information for educational purposes only.  Nothing in this blog article/document should be construed as formal financial or legal advice, of any kind. This information is general in nature and does not take into account your personal goals and circumstances. Before taking any action, you should undertake independent research to ensure that you do what is right for you. When you see the Financial Advisor for a Statement of Advice - that will be your formal advice.

Last last note. I haven't covered in here how you would live off the residential property investment as that is something you need to discuss with your Financial Advisor - you might sell the properties or hold on to them and live off rental income - that is part of the advice you will receive from your Financial Advisor and they will give you the best advice for your circumstances. Also note that this just covers residential property - you can also purchase commercial and industrial property... but I think the above is a good start for now.

Please send me an email to [email protected] and let me know how you are going with your retirement planning and if it has made a difference to your life.

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