By Bill Zheng

Since the push by the industry last year, all the major banks have now offered residential mortgages to help you purchase investment properties inside of your superannuation (Super) with money both from inside and outside of your Super.  They can be leveraged to 70-80% with very competitive interest rates.

It seems to be a new trend for property investors to add another one or two investment properties into their portfolio by buying them inside of their Self Managed Super Fund (SMSF).

I am not here to explain the mechanics of SMSF, I am going to talk about why you may want to look into this option and the possible benefits you may get from having a property inside of your super, and I will be speaking purely from a finance and property investment angle, and what I say here is not to be taken as superannuation advice.

There are quite a few obvious benefits I can see if you purchase a property inside of Superannuation which I will cover later on, but the main one is the tax benefit. 

Without going into the technical details about the calculation which is slightly different for everyone, I can simply tell you that you can be a few hundred thousand dollars better off in 20 years time when you buy an average $400k property today inside of your Super.  (For those who want a detailed walk through of this benefit for your personal situation, please contact our office directly).

Apart from a few hundred thousands dollars benefit in the future for an average property, there are many immediate benefits worth consideration.  For example, you may not need any additional cash or income to hold onto this additional property, everything is taken care of by your Super and its ongoing contribution, so you can technically add another property without affecting your standard of living.

Other immediate benefits are demonstrated by the property investors who are taking advantage of this new facility lately.  The following property investors may find investment property inside of their Super a very attractive option:

• Property investors who have maxed out of their normal borrowing capacity.
  Over the years, many property investors have bought as many properties as they can with their available funds and income, lenders won’t lend them any more money even if they want to buy more.

The good news is that if you have sufficient money inside of your superannuation and you are making regular (tax free) contribution through your job or business, lenders are happy to lend you money based on what is inside of your Super rather your financial situation outside of Super. 

What this means is that when they come to access your serviceability for a loan, they are happy to mainly look at your debt servicing ability inside of Super, i.e. can your Super contribution and the rent from the investment property together cover the mortgage repayment, and remember you can always make extra tax free contribution to your super if it is a little bit short.

• Property investors who are equity rich but income poor.
  If you have been investing in properties for the last 5-10 years, you may have more equity in your properties than you have income to borrow more money to purchase more properties.

There is almost nothing to stop you from moving some of your surplus equity into your Super, and you may be able to borrow more money inside your Super because the debt servicing is calculated independently from your existing property portfolio. 

In other words, you can use some of the money inside of your Super and some of the money (or equity) outside of your super, to help purchase a property inside of your Super.

• Property investors who are concerned about property prices fluctuation in the current market.
  If the investment property you are buying is for long term holding purpose, the longer the view you hold, the less important is the current fluctuation, as prices will always go up eventually.

Superannuation has always been like a saving type program to most people, especially if you look at their return over the years, it is not the vehicle to give you aggressive returns.

Having a mortgage attached to an investment property inside of your Super is similar to having a mandatory saving program, it forces you to keep the Super contribution going to reduce the debt, your whole aim is to pay down that mortgage and own the property outright for your retirement.

It is common sense that we start a saving program as early as possible, if you haven’t started one yet, maybe now is the time.  Hence you may consider buying an investment property sooner than later inside your Super, and the market fluctuation becomes insignificant if you were to hold it till retirement.

• Property investors who do not want to touch or gamble with their Super.
  Most people (property investors included) do not want anything bad happen to their Super, because it is their retirement money, this is one of the reasons why I haven’t spoken about using leverage against Super before.

The Superannuation mortgages being offered now by the major banks are non-recourse to your other assets inside of your Super, which means you will not lose the shares, cash or any other investments you have bought within your Super, the liability is quarantined by the value of the property and your loss is loosely speaking limited by the amount of money you put in as deposit for the investment property.

• Property investors who are in a position to purchase another investment property.
  If you have sufficient deposit (or equity) to buy another investment property right now and feel you are quite ready to do so, you are now presented with another option to buy this next property inside of your Super, because you can always make an extra Super contribution to fund the deposit for the property even when you have very little Super.

If you want to own this investment property outright (i.e. without mortgage) as soon as possible, instead of doing renovation or development to it down the track or leverage it further to buy more properties, buying this property inside of Super is a much better way to go.

One thing to bear in mind is that your property selection criteria may be slightly different if you were to purchase a property inside of Super. 

For example, an older property may not be as suited in comparison to a newish property if you were to hold onto it for more than 20 years inside of your Super.  This is because currently there is certain restriction on refinancing a mortgage inside of Super, and you have to tip in your own money to do renovation and there is no top up facility to release the increased equity.

Many property investors prefer to buy older properties in the past because they believe brand new or newish type properties experience slower growth in the first few years compared to older properties in the same area. This is true in most cases when you look at them within a 5 year period, but if you are holding onto the property for a 20-30 year period and not looking at leveraging up higher within the first 5 years, you will find newish properties will catch up with growth because they don’t need much maintenance and can still remain reasonably in fashion after 5-15 years, whereas a 30 year old property today will become 50 year old in 20 years time, you will have to spend money on maintenance and attract lower quality tenants.

Summary

There are more and more people setting up their Self Managed Super Funds, and because of the less predictable performance of the stock market recently, many people have started putting a part of their Superannuation or moving equity into their Super to purchase investment properties.  The new finance option just makes it a lot more practical to do so, and I think it’s time property investors can seriously take a look at this option.

Whether you have already had an existing SMSF set up or looking into setting one up, if you are considering buying an investment property in it, you need to make sure that your current situation is qualified for this finance option.

I suggest you call our office on 03 9868 7500 to check out your finance option first before you spend lots of money and time for Superannuation advice.  For those who can take it further, we can refer you to a few selected Superannuation advisors near you if you haven’t already got one.

This article was written by Bill Zheng, founder of Investors Direct, an award winning Mortgage Company specialized in strategies and finance for residential property investors since 2001.  Investors Direct is the finalists in the 2008 Australian Mortgage Award for Brokerage of the Year (Over 12 Staff Category) & Best Customer Service from an Individual Office.