If you’re thinking about buying an investment property using your super fund money because that’s the only capital you have available, you need to consider the following drawbacks.
1. Lower tax refund
When your Self-Managed Super Fund (SMSF) borrows to invest in a property (i.e., negatively gear), it can only claim a tax refund of 15% on the rental loss. This is much less attractive than borrowing in your own name in which case the tax refund can be as high as 47%.
2. Lack of diversification
For most people, the property represents the main (if not the only) asset of the SMSF. Having all your super fund balance invested in a single asset is too concentrated and risky.
3. Increased complexity
Borrowing or gearing your super into property involves very strict borrowing conditions and is complex to set up and hard to unwind.
4. More restrictions
You cannot use the property for any other purpose than investing for retirement, e.g., live in the property. You can’t make alterations that change the character of the property until you pay off the SMSF property loan.
5. Higher costs
SMSF property loans are considered as commercial loans and tend to have higher interest rates than other property loans. Additional setup fees also apply.
The idea of buying an invest property using your super fund money can be appealing. But when you consider its drawbacks, it’s prudent not to rush into it.
As always, feel free to call or email me if you want to discuss anything.