In 2007, the government changed the law to allow superannuation funds to borrow in order to buy assets. The most common asset that is generally bought with a loan is a property, and there are many super funds borrowing to buy properties. The question here is – is this a sensible move for you?
It depends on your circumstances. Borrowing to buy property is most certainly a suitable wealth creation strategy for many people, but it comes with risk, and that induces even more risk inside the superannuation environment.
On the positive side, you have access to gearing that should (over the long-term) provide you with a greater return on your investment. This is after all the reason that borrowing to buy assets occurs in the first place.
The downside however is that you have to be able to get a loan. At the moment, none of the four major banks will lend to a self-managed super fund to buy property. Other lenders will have severe restrictions on what they lend (such as only lending 70% of the value of the property).
Working out how to do it is a complicated process, so the advice of a licensed adviser should be sought. Their recommendation may be that you should only do it if you have a large super balance.
You will also need to be highly conscious of your cash flow requirements as well. In situations where you borrow money to buy a property, you will be required to contribute that money on an ongoing basis. As this is your superannuation that you may be looking to use, you need to be certain that you will be able to meet all of the cash flow requirements through super.
What if you need to fund a period of time with no tenants in your investment property? Will you be able to cover that?
With gearing, there is another risk to take into account before making a decision on whether or not to use your super when purchasing an investment property. Not only are your profits amplified, so are your losses. There have been instances where people have lost all their super because they have invested in the wrong asset. Upon the sale of that asset, they have had to use all of their super (and then some of their own money) to pay back the loan.
There is no doubt that borrowing to buy a property in your super fund is a great strategy but only for people with the right circumstances to do so. If you are looking for more information on this, feel free to give me a call on 0432 366 690 or book your free 15 min appointment here.