I am in my late 50's with around $200k in super. Can I use my superannuation to invest in property? What does this entail and do you consider this a wise move?
- Question from Diana in Bendigo
Top answer provided by:
Dishna Wijenayake
Hi Diana,
You may already have some exposure to listed property through your current super fund. But I assume you are referring to investing in direct property.
Direct property investments can be done through a self-managed super fund (SMSF). However, given that you are closer to retirement age and considering your super balance, this may/may not be a suitable strategy.
Is setting up a self-managed super fund (SMSF) an appropriate strategy for you?
An SMSF gives you greater control over your assets and investment decisions. At the same time, you are expected to take on all the duties and responsibilities of being a trustee. Running costs of your fund is another factor to consider. The general consensus is that you should have at least $250,000 of assets to make it a more cost-effective option. Therefore, you should explore further to determine whether this is a suitable option for you. Please see some useful information provided by the ATO.
Further, there are some general property rules to be aware of when the property is purchased through an SMSF as shown here
Market Value and Maintenance costs
Property values are significantly high right now. As the super balance is around $200,000, you may have to either borrow funds or make a significant contribution to super to purchase a property. Borrowing under an SMSF structure is called a ‘limited recourse borrowing arrangement’. This is a complex strategy and may not suit someone intending to retire soon. Making additional contributions to boost your super balance (i.e. both concessional and non-concessional) can be an alternative to borrowing. However, any funds contributed to super can only be accessed when a condition of release is met.
Further, ongoing maintenance and management costs would need to be considered when purchasing a property.
When are you hoping to retire?
You are in your late 50s, are you intending to retire soon? If so what are your cash flow needs in retirement? How would you fund your retirement? If you use all or the majority of your super money to purchase a property, would you be left with enough liquidity to draw a pension? Or are you intending to purchase a property now and sell prior to retirement? Or do you hold other assets outside of super to support your retirement? Property is generally considered as a long-term investment. As you are closer to the retirement age, you should consider your retirement needs.
Diversification
Diversification is a risk management strategy used to reduce portfolio risk through investing in a wide range of assets. There are different asset classes such as shares, property, fixed income and cash to invest in. At present, you may have exposure to some or all of these asset classes through your super. Further, you might be invested in both domestic and international assets through your current super arrangement. The aim of diversification is to have more consistent portfolio returns over the long term while managing your portfolio risk.
Investing your entire super balance in a single asset class, in this case, direct property will increase your portfolio risk. If you have borrowed funds to invest, your risk would increase further.
To conclude, as you are in your late 50s with a $200,000 super balance, I feel that setting up an SMSF to purchase property would increase your risk. Therefore, I strongly recommend speaking to a financial adviser prior to proceeding. A financial adviser can analyse your current position, retirement funding needs and can help decide whether an SMSF is suitable for you.
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