Given that your superannuation savings will likely be one of the largest forms of income in retirement, it makes sense that SMSF owners want to ensure they have the best investments for their portfolio. If you’re thinking about purchasing an investment property within your self-managed super fund, then you may be wondering whether it’s a good investment for retirement.
We discuss both the pros and cons of property investment for retirement, and what you need to consider before investing in property within your SMSF.
Is property a good investment in Australia?
Historically, property has been the poster child of the ‘Great Australian Dream’: to purchase and own a family home. So in that sense, property has typically been a favoured investment type for many Aussies, however, with times having rapidly changed over the past two decades, it’s important for investors to look at the fundamental characteristics of real estate property and understand whether it is the right investment option for them.
The benefits of property investment
We take a look at some of the benefits of property investment below.
Tangibility & familiarity
What many investors enjoy about property investments is their tangibility — property is a physical asset that you can see and feel. In some sense, this is more rewarding for investors than having a spreadsheet of different investments on a computer screen. For certain demographics, property is also an easy-to-understand investment, as it’s long been discussed between friends and within media, making it seemingly lower risk than some newer investment options that require particular specialised knowledge.
Bear in mind: holding only a property portfolio, with no other asset types, could introduce concentration risk. It’s important to also consider a diversified portfolio to help manage different types of investment risk, whether inside or outside the superannuation environment.
Long term capital gains
However, more than tangibility, the property market typically increases in value over the long term, providing investors with capital growth opportunities. Property prices have risen sharply in Australia recently, which has been welcomed by property investors.
The rental income on property is also a drawcard, as it can provide a steady income that can either go to meeting the investment mortgage repayments, or, once the property is owned outright, the positive cash flow can be used to create a retirement income.
There are some potential tax benefits to owning a rental property, such as the possibility of claiming deductions for the costs involved with owning the property, including interest charges, maintenance costs, property management fees, council rates and more.
Some things to consider before buying an investment property
There are, however, some things to consider before jumping into property investment.
Rental yields fluctuate
Just as the income yield from other investments fluctuates with the market, rental yields can also fluctuate over time. While Australia is currently experiencing strong rental income due to very high rental demand, relying solely on rental income as your primary income stream in retirement means understanding that your income could fluctuate due to factors outside your control. This is an important consideration when looking to meet your desired retirement lifestyle, particularly if you’re not going to be eligible for the age pension.
It’s also important to understand the ongoing expenses of owning an investment property. Most people are aware of the legal fees, such as conveyancing fees and stamp duty when initially purchasing the property, however, you must also consider the running costs of the property.
If you borrow money to purchase the property, then there will be loan fees and interest rates to cover. Landlord insurance, management costs such as property management fees, body corporate fees as well as council and water rates are all expenses that need to be factored in when calculating the net return of a property investment. (Although, as we mentioned above, you can claim tax deductions on most of these costs)!
Capital gains tax
While it’s true that many investors enjoy the tax-deductible nature of expenses associated with owning an investment property, when it comes time to sell the property, you must consider the impact of capital gains tax. Your SMSF may be entitled to a capital gains tax (CGT) discount of one-third if the eligibility criteria are met.
Top tip: talk with your accountant about whether you can also claim real estate agent fees at sale time!
Investing in property within an SMSF for retirement
Investing in property is one of the main drawcards for SMSF owners, as this option is not available through APRA-regulated super funds. Property investors understand that as a long-term investment, investment properties can contribute to their wealth creation during their wealth accumulation years, and as an income-generating asset once they reach retirement age.
As is the case with most significant financial decisions, it pays to access professional advice on the best investment strategy for your self-managed super fund. When it comes to borrowing within your SMSF to purchase a property, it’s equally as important to access the expertise of specialists in SMSF lending.
At SMSF Loan Experts, we help SMSF trustees with establishing Limited Recourse Borrowing Arrangements (LRBA) for SMSF property investment. Let us help you reach your retirement goals —contact us to find out how.