Investors turn to SMSF to fund their next properties

Shore Financial chief executive Theo Chambers said the rise in SMSF property investments is due to the improved access to SMSF lending and a growing discontent with traditional funds.

“Previously, obtaining SMSF property loans was challenging. Now, lenders are offering more competitive rates and terms, including higher loan-to-value ratios (LVR) of up to 90 per cent,” Chambers said.

Additionally, Chambers pointed out that some lenders are now considering future superannuation contributions when assessing investors’ borrowing capacity, which can help self-employed borrowers access funds even if previous contributions had been irregular.

Another factor driving SMSF property investment is the growing dissatisfaction with the performance of traditional superannuation funds, which have pushed people to set up and manage their super funds themselves.

Chambers noted that the All Ordinaries index has had only a modest growth recently surpassing 8,000 points while it was close to 7,000 points before the global financial crisis over 15 years ago.

“Added to this is the issue that many super funds haven’t met the ASX index as a benchmark for the past five to 10 years, with many not breaking even after management fees,” said Chambers.

Last year a report from the Australian Prudential Regulation Authority (APRA) found that one in five funds had significantly underperformed against benchmarks, while some other funds were called out for overcharging and unfair practices.

In comparison, research from the University of Adelaide showed that SMSF outperformed traditional super funds by an average of 4.1 percentage points during the 2021–22 financial year, which was the largest gap observed in the six years of the study.

“Investors are seeing the poor performance of their super and chasing bigger returns,” Chambers said.

“For many, the decision to turn to property within their SMSF is about both confidence in property’s growth potential and a lack of satisfaction with their super returns.”

In March 2024, ATO data showed that there were more than 616,000 SMSFs nationwide which accounted for $933 billion in assets, or about 24 per cent of the $3.9 trillion invested in superannuation.

Chambers also said that Australians’ perceptions of SMSFs have also changed which helped ramp up their numbers.

“People previously felt they needed $500,000 or more to justify an SMSF, however now with lower setup costs from competitive accountants and financial planners, individuals can consider SMSFs from a balance between $150,000 to $200,000,” he said.

He noted one key advantage of SMSF property investing is the ability to leverage funds as investors amplify their potential return compared to investing the same amount in shares or managed funds.

“SMSF investors using $200,000 in super to buy a $1 million property are achieving capital growth on the $1 million, not just the $200,000,” Chambers said.

Additionally, more investors have used their SMSF to invest in commercial property whether it is by leasing the premises to their own business to ensure the rental income back to their fund or through property syndicates where members get together to buy larger assets.

Chambers added that SMSF loans have better financial security due to their limited-recourse borrowing arrangement.

“The other benefit of limited-recourse borrowing via an SMSF is that it doesn’t affect your serviceability for traditional borrowing outside your super,” he said.

“That means someone can buy an investment property through their SMSF, without it damaging their ability to qualify for another home loan outside their super, which they might use to upgrade their family home or buy an investment property.”

“This structure has become an essential part of the appeal for investors who want to grow their asset base in a way that doesn’t interfere with their personal financial goals,” Chambers concluded.