It’s an exciting time to be managing your own superannuation. With recent changes to government policy, its now easier to leverage what funds you have in super to purchase property.
While this ability to take control of your retirement planning is exciting, it’s essential that you know the characteristics of an asset before you find a place for it within your fund. Each asset class carries its own risks, and property is no exception. Here are some things you need to consider.
Asset allocation risk
The costs of entering the property market are quite high when compared with equities and the outlay on deposit and stamp duty alone can take up the majority of a fund, creating the risk of having many of your eggs in one basket.
Like the share market, the property market can and will change over time. What may seem like a solid investment today may experience an unforeseeable circumstance in the future leading to unwanted expenses or a fall in value.
To weather an unexpected financial storm, it is essential that your financial position doesn’t rely on the outcome of a single asset and you have other asset classes to rely upon.
Loan repayment periods
Once in the pension phase, there is very little tax advantage to carrying debt. On the other hand, the more tax-free income you have, the better your lifestyle.
With this in mind, it’s important to consider the repayment period for property loans, paying particular attention to the end date.
The timeline below shows the 20 and 30-year markers indicating where your loan repayments may finish depending on the age at which you undertook the loan (click on it to view a larger version).
[1]Given the typical repayment period is between 20 to 30 years, ideally you would purchase your property within super before the age of 45 to ensure you had fully repaid your mortgage by retirement at 65.
If you chose to purchase in the yellow ‘cautionary’ period, ideally you should have strategies in place to pay down your mortgage faster or contribute more in lump sum payments so you enter retirement debt-free.
The red period – after age 65 – leaves little opportunity to repay the mortgage or to benefit from capital gains and income. It may only become a consideration if you are thinking of leaving the asset as a legacy for family.
Minimum Withdrawal Risk in Pension Phase
As legislation requires beneficiaries to withdraw a minimum of 4% of the portfolio’s fund each year, minimum withdrawal risk becomes an important consideration when using Super to invest in property.
If the majority of the fund is left holding a property with very little liquidity left to pay out a pension at the required rate, then you could be forced to sell the property to meet these payments. Any growth that the asset may be experiencing would also be sacrificed.
Even if property doesn’t make up the majority of your portfolio, it’s important to remember that property is bulky and doesn’t have the liquidity of shares and other similar assets that can be sold quickly. If you decide to sell, it may take weeks or even months to liquidate.
Property as a long-term investment
This is one of the largest considerations that will need to be addressed if you’re looking to invest in property responsibly with your super fund, regardless of whether you have the ability to pay down the debt quickly or not.
Well-located, median-priced property will ideally double in value every 10 years or so. Like any market though, property growth has its peaks and troughs. Some years it may grow strongly and others it may remain stagnant or slip.
For this reason alone, you should aim to hold the asset for at least 10 years to take full advantage of growth potential. Any less may lead to disappointing results.
The bottom line
Like any investment decision, each of these considerations will vary depending on your own circumstances. You may not choose to retire at 65, or you may have the ability to pay down a property loan much faster and take full advantage of the rental income.
Either way, it pays to take the life of the investment into account as well as the size of the outlay to invest in property responsibly and safely. Managing factors such as these can lead to a lucrative property portfolio that bears fruit for years to come.
This information is provided to profile the basic elements of investing in property using your super. However, each situation is different and we recommend that you seek professional advice from a trusted adviser that specialises in superannuation and property.
Next week: Keep an eye out for our list of the hottest and not so hot suburbs around Australia, due in next Thursday’s Switzer Super Report.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.
Also in the Switzer Super Report:
- Peter Switzer: The muddle through is speeding up [2]
- Charlie Aitken: Stock buys for the new financial year [3]
- Ron Bewley: Don’t be scared of investing in equities [4]
- Andrew Bloore: Nine new rules for your super start now [5]