In recent years, changes to the Superannuation legislation have meant it’s now possible for self-managed Super funds (SMSFs) to use borrowed funds to acquire property, providing a greatly enhanced opportunity to diversify investment portfolios. This has sparked a lot of interest from Australians.
Over the past 15 years, the average Australian Superannuation funds have returned 5.19 percent per annum net, with retail Super funds at 3.84 per cent and industry funds at 5.59 per cent.
Over the same period, Australian property has grown by 8.42 per cent. This, in addition to average net rent of about 3.6 per cent, gives a total return of 12 per cent per annum.So why haven’t more Australians invested in direct property with their Superannuation? Prior to 2008, in order to acquire property, an SMSF had to be able to pay for it outright. Since the Superannuation legislation was changed in September 2007 to allow borrowing, it is now becoming far more common.
The big question is, by how much are property and Superannuation funds likely to grow in the future, and how would this look? Let’s consider two scenarios for a couple aged 45 with a combined income of $200,000, and a total of $180,000 in Superannuation, and who wish to retire at age 65.
Scenario one is that they continue to invest in a traditional Superannuation fund, and this fund achieves an average return of six per cent per annum. They contribute the usual 9.5% of their income now. As mandated by the government, this contribution gradually increases to 12% of their income by 2020. By the age of 65, they should have accumulated $1,585,000.
However, in today’s dollar terms, allowing for inflation, it is actually closer to just $950,000. If the Superfund continues to return 6%, they will only have about $57,000 to live on each year between them.
Scenario two is that they use some of their funds to invest in a $400,000 property, and we assume a conservative rate of growth at 5% (which is just 2% above inflation). The property attracts rent of $400 per week, less typical costs of interest, agents’ fees, insurance, maintenance, and vacancy, and we allow for a 20% deposit plus costs totaling $105,000, leaving $75,000 in their normal Superfund growing, as above, at 6%.
After 20 years, the total combined net value of the property and Super comes to $2,170,000, or $1,300,000 after allowing for inflation. This is $350,000 or 36% better than the Superannuation fund only model.
Using an SMSF to borrow funds for property investments can be a very powerful tool. The information above is general in nature and there is plenty to think about, so before deciding if this is the right strategy for you, seek advice from your appropriate advisors.