Can You Buy an Investment Property with $700,000 in Super?

Can You Buy an Investment Property with $700,000 in Super

Planning Your Investment Property Purchase

If you are considering using your super to purchase a geared investment property, careful planning is crucial.

With $770,000 in super invested in shares and being close to retirement, you need to evaluate how this move fits into your overall retirement strategy.

You and your wife, both 52, are looking to diversify your retirement savings by setting up a self-managed super fund (SMSF).

However, the decision involves several important considerations.

Assessing Retirement Needs and Expectations

With retirement or semi-retirement planned in six to eight years, it’s essential to determine how much income you’ll need once you stop working.

Financial planner Chris Fagan from SCM Financial Group suggests that most people aim to be debt-free and have sufficient super savings to provide a steady income in retirement.

Whether your SMSF, which plans to own a medium-sized investment property, can help achieve this depends on various factors, including the potential for capital gains and rental income.

Investment Time Horizon and Market Risks

Shane Oliver, head of investment strategy at AMP, cautions that a six- to eight-year investment horizon might not be sufficient for significant property price appreciation.

The property market is unpredictable, and buying at the peak could result in minimal gains or even losses by the time you retire.

It’s essential to conduct thorough research on property price trends in your desired location to make an informed decision.

Conducting Detailed Property Research

Before purchasing an investment property, you must do your homework on price trends, rental returns, and tenant demographics.

For example, if the area relies heavily on foreign students, be aware that changes in government policies on student migration could affect demand.

Additionally, investigate the supply of rental properties and how long similar properties remain vacant.

These factors will help you choose a property with a good potential for rental income and price appreciation.

Considering Interest Rates and Loan Conditions

Interest rates for investment properties are currently around 7%, and even higher for SMSF-owned properties due to limited recourse loans.

These loans often come with higher interest rates or require personal guarantees from fund members.

It’s important to assess your tolerance for high-interest rates and ensure that rental income will cover the mortgage and property maintenance costs.

Finding a positively geared property, where rental income exceeds mortgage costs, is becoming increasingly challenging in Australia.

Evaluating SMSF Suitability and Tax Implications

Before moving your money from a Macquarie super fund to an SMSF, consider the tax implications and whether this aligns with your retirement plans.

Selling down investments in your Macquarie accounts might trigger capital gains tax, although it is concessionally treated.

An SMSF can offer more control over your investments and potentially lower fees, but it also requires careful management to ensure it meets your retirement needs.

Exploring Alternative Investment Options

Macquarie and similar retail or industry funds offer a variety of investment options, including managed funds, direct shares, exchange-traded funds, and listed investment companies.

These options might provide a more diversified and less risky investment strategy compared to a single investment property.

If you’re interested in gearing, you could also consider geared share funds.

Managing SMSF Pension Obligations

As you approach retirement, managing the SMSF’s pension obligations becomes critical.

For instance, if your property asset grows to $2 million and you enter the pension phase at 65, you will be required to withdraw 5% of the SMSF, or $100,000, annually.

Ensuring that your investment property can generate sufficient rental income to meet this requirement without needing to sell the asset is crucial.

Funding Your Investment Property

Funding the purchase of a medium-sized investment property will require at least a 20% deposit plus additional costs.

You need to consider whether you can add more funds to your super (within contribution limits) or if you should trigger capital gains tax and roll over your Macquarie accounts into the SMSF.

This decision requires careful consideration and potentially professional advice to ensure it aligns with your long-term financial goals.

In summary, while purchasing an investment property with your super can be a viable diversification strategy, it involves several complex factors and risks.

Thorough research, financial planning, and professional advice are essential to making an informed decision that supports your retirement goals.

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