What you need to know before using your super to buy an investment property

It seemed the perfect arrangement: a father buying an apartment through his self-managed super fund (SMSF) for his daughter to live in.

But just as she was preparing to move in, he suddenly thought he’d better double-check it would be OK.

“I told him that it wouldn’t, and she’d have to find another place,” says Yannick Ieko, the founder of SMSF Loan Experts.

“That would be a clear breach of the super rules.”

“If you’re investing in residential property through your SMSF it has to be a clear investment – not a home for you or for a related party, like a family member or employee, even if they are going to pay you a market-rate rent. The only exception to that rule is if it’s a farm.”

The laws around what you can do, and can’t do, with an SMSF can be a challenge to unravel.

But at a time when most property markets are enjoying unprecedented capital growth, interest being earned on funds is so low and money so cheap to borrow, there have never been as many people inquiring about how they can invest in residential real estate through their SMSFs.

Generally, it’s pretty simple.

SMSFs can apply for loans on property and can buy houses, townhouses or apartments, but then there has to be a clear lease to an uninvolved party.

The property must also solely provide retirement benefits to fund members.

Many people today are, however, buying properties on the coast or in the country with the idea that, when they retire, they might leave the cities to set up there instead.

It is possible to do that through an SMSF, too.

“Because you’re of retirement age, you can access your super funds,” says Tania Magon, principal of super specialists Maven Advisors.

“But the asset would still be in the name of the fund so what you have to do is buy it from the fund, maybe with the money you’ll get from selling your city home.”

“It’s just like buying any property, except you won’t have negotiation problems. You’ll have to have a valuation to make sure you pay the right price and for stamp duty. The main issue is that you still need to make sure the property, in the first place, will be a good investment as its primary purpose is to provide for retirement.”

That provision could be from rental returns or capital growth, but it does need to be clearly documented for the authorities.

As for a home loan, the rate of interest for an SMSF will be higher than one for an individual buyer, but the fund is able to borrow up to 80 per cent for up to 30 years.

“Rates have come down across the board, and a rate for an SMSF would be close to 4 per cent now,” says broker Alex Lambros, a director of Loan Market.

“If you bought in the past, though, you’d have to refinance an existing loan for that rate, and you can’t access the equity in that property to buy the next one; you’d have to sell it.”