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Why Are People Buying Property In Their Super?

Are you wondering why more people are buying property through their Self-Managed Super Funds (SMSF)? In this article, I explain why this strategy is becoming popular, whether it’s a good idea for your portfolio, and how real clients are using SMSFs to supercharge their investments. Find out how pooling super balances, leveraging different borrowing rules, and a well-planned SMSF strategy can set you up for long-term financial success.

Written by
Ravi Sharma
Published on
October 10, 2024

Table of contents

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I remember talking about buying property in your SMSF or super accounts a couple of years ago, and at the time, nobody really knew what was happening. 

Now it seems like everyone wants to buy property in their SMSF. 

In this article, I'm going to share with you:

  • Why people are wanting to buy property in their super;
  • Whether it is a good idea to invest in super; and 
  • What the numbers actually suggest. 

I’m also going to share with you a real client experience of what they bought, what the numbers look like, and why it may supercharge your portfolio. 

If you're interested in what my thoughts are, definitely keep reading.

What is a Self-Managed Super Fund (SMSF)?

An SMSF is a self-managed super fund

What most of you have at the moment is just a normal super fund; it's a traditional super fund that's managed by someone else.

If you think about this, it's like having a bank account that your employer is contributing towards in the background, and it's being managed by the bank to invest in things, whether it’s aggressive or something less aggressive. 

A self-managed super fund is exactly that — you manage it yourself. 

Not only do you still have the same options of investing into something aggressive when it comes to shares, but you also now have the option to invest into property. 

Now, there are some rules around how you can invest in SMSFs and how to set it up properly. If you need help, contact me at ravi@searchpropertyau.com.au so I can point you in the right direction with a savvy accountant who can actually get this done with speed.

Now, let’s dive into some numbers here in Australia. What does it actually look like? How many people are actually doing this, and why are they doing it? 

2024 SMSF Statistics in Australia

As of 4th July 2024, there are 1.1 million members with $869 billion in super. 

Barbara Drury update on July 4, 2024 states that Smsf statistics:1.1 million members with $869 billion in super

Well, that sounds good! 

Self-managed super funds (SMSFs) in Australia are privately run super funds for between one and six members, who must also be trustees of their fund.

ATO statement about the SMSF’s members funds 

Now, if you didn’t know, right now, your super fund is probably sitting in your own name, and then you have your partner’s name. 

In a self-managed super fund, you can have both of your super balances come together. 

Now, if you think about it: one person has $100,000, the other person has $100,000 — now you have $200,000 and that allows you to get into property, whereas individually, you can’t. That’s where you have so much flexibility around these sorts of things.

Again, I'm not going to give you any tax or financial advice when it comes to this. You've got to make your own decisions and think logically about your strategy and what this can actually do for you. If it makes sense, and you actually want to buy property in your SMSF, then contact an accountant, and they would be able to set it up for you.

How Many SMSFs Are There? 

According to the latest Australian Taxation Office (ATO) data, there were 594,334 SMSFs in Australia as of June 2023, reflecting a 2.5% increase. This shows steady growth in the sector despite ongoing market uncertainties.

As shown in the table below, while the number of new funds established slightly declined, so did wind-ups in the year to June 2022. This led to the strongest net increase in establishments in several years.

A large reason why this is happening is that, let’s say your borrowing capacity is maxed in your personal name and you can’t buy more real estate, people have often gone to the SMSF because it’s a different set of rules — the same borrowing capacity doesn’t apply in your SMSF. So, you could be maxed out in your personal name, but in your SMSF, you still have borrowing capacity, allowing you to buy more real estate.

Now, let’s look at the table:

Table showing year ended, establishments, windsup, net establishments, and total number and member of SMSFs‍

From 2018 to 2023, we can see the trend in net establishment numbers. In 2018, the numbers were declining, but by 2023, they've increased by 14,000. 

Looking ahead, I would estimate that 12 to 18 months from now, that figure could be closer to 20,000 to 25,000 annually.

The Average and Median SMSF Balance

According to the report:

If we look at the table below, we can see the average assets per member and how that number has increased from $652,000 all the way up to $780,000. 

Table showing average assets per two years

I don’t like how this website does it because it should show the lowest dates here, but it’s doing the opposite. It was the same with this graph as well — it should start with 2018 and end up in 2023 because that’s how our minds read these things. 

Table showing year ended, establishments, windsup, net establishments, and total number and member of SMSFs

What we can see is:

  • The median assets per member have gone from $378,000 to $467,000. 
  • The average assets per SMSF have risen from $1.2 million to $1.4 million.
  • The median assets per SMSF have gone from $672,000 to $826,000.
Table showing average assets per two years

So, what do these numbers actually look like when it comes to the asset balance and the percentage of SMSFs? 

If you look at it, 0 to $50,000 accounts for only 5.4%, then $50,000 to $100,000 is less than 2.3%, and $100,000 to $200,000 is 5.6%. 

Table showing percentage of smsfs per smsf asset balance

Now, the bulk of the numbers are here: 

  • Between $200,000 and $500,000 is 19.6%.
  • $500,000 to $1 million is 25%.
  • $1 million to $2 million is 21%
  • $2 million to $5 million is 15.5%. 

You also have almost 4% between $5 million and $10 million, and more than $50 million is less than 0.1%.

Continuation of the table showing percentage of smsfs per smsf asset balance

These numbers are absolutely wild, but if you actually think about the compounding nature of what you can do now, and how if you were to buy property and did it over a period of 30 years, these numbers don’t seem so ridiculous.

Type of People Setting up SMSFs

1. The Controller:  The most common type of SMSF member. They want to have a high degree of control over the management of their fund and investment decision-making. 

2. The Self-Directed Investor: this type is less likely to seek professional advice in managing their fund or making investment decisions than a Controller. 

3. The Coach Seeker: Coach Seekers take a moderately active role in managing their SMSF and making investment decisions.

4. The Outsourcer: this type of SMSF member prefers to almost totally outsource day-to-day admin of their fund and investment decision-making to professionals they hire.

A large portion, and I would say 99.9% of the people that come to us, are the Outsourcers. 

They basically say, "Look, I have enough to manage in my day-to-day life. I don’t want to sit there and make the wrong decision with my SMSF when it comes to the type of property I want to buy. I know I want to buy property, but I just don’t know how to execute." 

Well, that’s why they contact the buyer agency (Search Property). If you need that sort of help, definitely book a FREE discovery call with my team. We help Australians every single day when it comes to SMSFs, growing their portfolio from just one property all the way up to four or five properties.

Now, as of the 30th of June 2021, let's look at where the money is being spent.  How are people spending their SMSF? 

16.9% are leaving it in cash or term deposits, so they don’t even want to be in the market. 

They’re saying, “Look, the market’s too volatile, I’m just going to leave it in cash,” and I think this makes a lot more sense when you’ve got a larger portfolio. So, imagine having, say, a million dollars in cash; if you just put that at 5% in the bank, you’re making $50,000. As a retiree, that’s a lot of money if your house is paid off, so they don’t want to take that risk.

You then have unlisted trusts. Then you have non-residential real property—about 9% goes into things like commercial property. Other assets sit at 8%, limited resource borrowing arrangements at 6%, and listed trusts at 6.5%. Residential property is at 4.9%, and 30% is in shares.

Graph showing SMSF asset allocation during June 30, 2021

A lot of people don’t know this, but you can still have a diversified portfolio when you go and put it into an SMSF. It’s not like you just have to say, “Okay, I’m going to put it all into one thing.” 

You still have the choice—in fact, you have more choice by doing it yourself. What’s interesting is that the number was 5% in 2021, but I’d estimate it’s probably closer to about 7% or 8% now. 

The reason why commercial property is in there is because of the net cash flow.

Real Numbers From a Real Client (Whiteboard)

Alright, so what I want to do now is share with you my whiteboard and look at some numbers from a real client. I’m not going to use their real names, but this should give you an idea of the possibilities when you’re leveraging money. 

For this example, we’ll call the couple Kevin and Anna, but that’s not their real names. 

They wanted to supercharge their portfolio in SMSFs, and they said, “Look, Ravi, I want to buy property here. I know what the risks look like because I have to take out a loan, but we’re comfortable with that.”

So, they’re in their 40s, and they asked, “How do we go about buying property in SMSFs?” 

The rules are a little different. The first thing you’ll notice is that there’s a 20% deposit, so you can’t just go out there and say, “I’m going to get a 5% or 10% deposit,” like you would in normal residential real estate. You also cannot use the equity from one property to purchase another property. 

Now, in this case, they went ahead and purchased a $500,000 property. It required a 20% deposit, making it $100,000. With the stamp duty and fees, it worked out to be closer to $130,000. 

 Ravi explaining the sketch calculating the balance of kevin and anna purchasing a $500k worth property

They may need a little more because you probably want some emergency funds as well. So in this case, their balance was $300,000, and they bought two properties. 

Sketch on buying 2 properties with the $300k balance

The real numbers are:

The first property was $502,000, and the second was $455,000, bringing their total asset value to $957,000. 

That left them with $50,000 in cash, which they decided to keep entirely in cash in case of property maintenance costs. They weren’t really interested in shares since they were already investing in an Exchange-Traded Fund (ETF) outside of their super, so they were comfortable with that.

Calculation on the asset value of having two properties

At a conservative 5% growth over 10 years, the portfolio should be worth $1.158 million. 

By the time they retire, which is when they can access this money, it should be worth about $2.5 million. By then, the properties will be completely paid off. 

Their strategy was that the rent plus employer contributions would allow them to pay off the home loan completely, without having to put extra money out of pocket. 

Calculation on the amount that should be paid off

By the time they’re 60, they will have net assets worth $2.5 million. The two assets will be worth about $2.5 million, and the rent, even at a 4% yield, would be about $101,000 annually.

By their 60’s they’ll have a net asset worth $2.5 million

We’re also helping them buy property outside of their super, so they’ll have their principal place of residence completely paid off by 60, along with a couple of other investment properties. 

Just with this scenario, having $100,000 in rental income at 60, plus a paid-off house, means they’ll have almost $2,000 a week to live a very comfortable life. 

What’s more important is that the asset continues to grow, so they don’t have to draw from the $100,000 principal—very powerful stuff.

This is a 3X return compared to their best-case scenario if they had continued on their original path, where they would have made about $30,000 a year. Now, they’re looking at $100,000 a year.

Written note saying the rent is 3x best case 

A few things to keep in mind: you need to understand:

  • Ongoing costs;
  • Rent growth; and 
  • Capital growth. 

If you don’t have these things, it means you bought in the wrong areas or didn’t use the right skills and data to make your decisions. That’s why I offer this service—people are out there making poor decisions, and while there is a fee involved, it’s small compared to the potential outcomes.

Now, here’s the bonus. This strategy works, and we’re currently doing it with another client. They’re in their 50s and have higher-growth properties. After 10 years, the two properties would be worth about $1.5 million. The debt would still be about $800,000, leaving them with $750,000 in equity

Written solution if having no equity to buy again

They could sell both properties and, after taxes, have about $600,000.

Difference if 2 properties will be sold or just rented in the next 10 years

Now, $600,000 isn’t enough for complete financial freedom, but it’s a 2X return in their super portfolio in 10 years, which wouldn’t have been possible without leverage. They can then use that $600,000 to purchase four properties worth $500,000 each, giving them a $2 million portfolio. At a 5% yield, that’s $100,000 in rental income.

A sketch shows buying 4 properties with a $600k 

By diversifying their risk and assets, and taking on more debt, they’re setting themselves up for a $3.2 million portfolio in 10 years with $128,000 in rental income. 

Properties worth after 10 year are calculated

That’s better than having just two properties yielding $101,000 and a $2.5 million valuation.

Written before and after properties worth and valuation

They could then choose to sell some properties and pay off their principal place of residence or diversify their holdings even further. Having the right strategy and expertise around you is crucial to mitigate risks, and if you need help, book a call—I’d love to help you scale up your portfolio.

Hope you guys enjoyed this article. I’ll catch you in the next one. Thanks, guys!

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