Housing affordability challenges have meant buyers are looking for alternative ways into homeownership.
In capital cities, where property prices have risen 34.1% since the start of the pandemic in March 2020, according to CoreLogic, it’s become increasingly challenging to save enough to buy a home.
One alternative is buying using a self-managed superannuation fund (SMSF), an increasingly popular path for millennials looking to enter the property market.
The Annual Benchmark Report, released by accounting technology firm Class, revealed that millennials (aged 28-42) accounted for 27.7% of all new SMSFs in 2023-24, making them the second-highest generational demographic establishing SMSFs.
At a recent panel discussion on SMSFs, Class general manager Kate Anderson said millennials were having a difficult time saving for a deposit, and so were turning to using their superannuation savings, where they likely had a larger balance.
What’s the appeal of SMSF property investment?
SMSFs allow members to manage their superannuation investments and choose where their money goes, including direct property investment.
This option is particularly appealing to millennial super fund members who are already accumulating substantial funds through the compulsory superannuation guarantee (SG), currently set at 11.5% of their income and due to increase to 12.0% by 2025.
The double-digit SG means that many millennials are building solid financial foundations; in turn, this means they might be able to save a property deposit faster inside than outside super.
How to buy a property through an SMSF
Buying property with an SMSF home loan is a different process than a regular home loan, because it’s governed by different regulations.
The first step is to set up your SMSF, which involves creating a trust and appointing trustees, and which must comply with Australian Taxation Office (ATO) rules. It is recommended you work with a financial adviser with SMSF experience so you are fully compliant.
Next, you’ll need to start contributing to your SMSF. Your fund must have enough money in it to cover the property purchase and additional costs such as stamp duty and legal fees. Contributions to the SMSF can be made from various sources, including salary sacrifice, personal contributions and rollovers from existing superannuation funds.
Once you have accumulated enough in your SMSF, you can begin your property search. SMSF mortgages can be used to buy both residential and commercial property.
A residential SMSF property must:
A commercial SMSF property, however, can be leased to a fund member for their business but it must be leased at market rate and follow specific rules.
Borrowing through an SMSF
SMSFs can borrow money to buy property using a limited-recourse borrowing arrangement (LRBA). Under an LRBA, the loan is secured against the property, but if you default on the loan, the lender’s recourse is limited to the property itself, meaning other SMSF assets are protected.
Given the specialised nature of LRBA arrangements, it’s recommended you work with a mortgage broker who has experience in SMSF lending. They can guide you through the complexities of the process, ensure compliance with ATO regulations and help you secure competitive terms for your SMSF loan.
Why millennials can benefit from buying property through SMSFs
SMSFs are becoming increasingly popular as a means of property investment for millennials for several reasons. SMSFs offer control and flexibility, allowing millennials to choose priorities that align with their goals and financial circumstances. This control is valued by young buyers looking to manage their financial future.
SMSFs offer diversification, enabling millennials to invest in property alongside traditional assets like shares and bonds, which helps spread risk.
There can also be tax advantages to SMSF property investment, with SMSFs providing concessional tax rates on super fund earnings, including those derived from property investment. This makes SMSF property investment a tax-efficient way to build wealth.
Buying an investment property through an SMSF also allows millennials to rentvest. This means renting the home they live in, in a location that suits their lifestyle, while benefiting from the rental income and capital growth earned by their investment property. Generally, the investment property is bought in a location that is more affordable than where the millennial buyer wants to live, such as an interstate or regional location.
Are you interested in buying property through your SMSF? Speak to Shore Financial about your finance options. Call us on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.