Wednesday 6 August 2014

Leverage makes a huge difference to the Growth of a Super Fund…


I am often asked, “What are the advantages of buying property in Super?”

We are all different and while there are actually many reason and I have listed some of the more common ones at the end of this document for me I think that the most significant is

Leverage.

Let me give you an example of the significant difference leverage makes to a super fund growth.



Let’s assume your Super Fund has $120,000 in it, and it earns 8% each year after expenses.
(NOTE: That is hard to do nowadays…)

Ignoring fees, MERs and other expenses it will grow at $9,600p.a. plus yours and your employer’s contributions.

Alternative:

You use that $120,000 to buy a property for $400,000, borrowing $300,000. You would use $100,000 from the fund as deposit and the $20,000 to cover Stamp duty and other costs (approx. only).

That property only has to increase in value by 2.4% pa to get the same $9,600.

Which do you think is more likely 8% every year from your existing investment or 2.4% from a well located property?

History has shown that properties average above 7% in growth over the long term so if that continues then your fund would have an average growth of at least $28,000. Some well-located properties will exceed this (over the long term).

But there is more…

The property would be cash-flow positive from day one:

Mortgage on $300k @ 5% = $15,000 (may increase in the future but unlikely for a couple of years)

Rent on $400k @ 4.5% = $18,000 (rent will increase over time)

So growth of $28,000 + (18,000 –15,000) + Tax Deductions for depreciation = over $31,000 per annum + your and your employers contributions.

Your Super Fund growth would be in excess of $31,000 per year (on average) compared to $9,600 under the existing scheme.

The excess of funds can be used to reduce the principle of the loan so you should be able to pay off the loan in about 12-15 years or less. Then the rent and growth are positive cash-flow into the fund.

Then after retirement the growth and rent from the property are CGT and Tax free.

Because property is a less volatile asset this strategy is a “set and forget” strategy.

Other reasons are:

       You might want a more stable asset in your Super

       You might not have enough equity for the deposit the Bank requires as an ordinary investment (10% for most lenders).

       You might have existing properties already and the Bank won’t lend you anymore money.

       You might want to minimise CGT on the growth of the property.

       You might not want to have any more properties affecting your personal cash-flow.

       And there is another very big reason… Property continues to grow in value even after you have retired and ceased contributions. It may even be possible that the growth alone exceeds your income requirements in retirement.

For more information about Property investment within Super consult your Accountant, Financial Planner or give us a call 1300 13 10 99