This comparison is designed to demonstrate the difference between an investment that only uses money you have, verses an investment where you are able to add a property mortgage to take advantage of the growth rate on the property.
We are very aware that the comparison does not take setup and running costs into consideration. Those costs can be very different for every investment and every investor. While they do influence the overall outcome of an investment, using a property mortgage in a super fund has a very large effect on the growth potential of an investment.
Scenario 1 – The Typical Super Investment
Because typical super funds achieve an average result, most Australians don’t monitor their super or review its performance often enough. Most people assume their super will be ok at retirement. But will it be enough?
Industry statistics show Australians retire with an average super balance of between $250,000 and $330,000. If you are planning for 20 years of retirement, that’s $12,500 to $16,500 per year, so you’ll need to be reliant on the aged pension as well. Are you happy with that retirement plan?
For those that research their super options, research is typically limited to industry super funds. This is scenario 1 in our example chart.
In these typical super funds, growth is limited to your own money. The funds don’t loan money for investment, so growth is always based on your super balance.
That might sound normal, but it’s not the only way of doing things.
Scenario 2 – Property Investment in Super
Part 1 – Property
If you own a home, you probably borrowed money to buy it. After 10 years, the wealth you’ve built is based on the growth of the property value. You’ve used (or leveraged) the bank’s money to buy a property that is worth more than your deposit amount.
If you’ve held a property for more than 10 years, You’ve probably created more wealth than the average super fund at retirement ($250,000 – $330,000).
Part 2 – Super
In 2007, tax laws changed to allow borrowing for property in a super fund, and the results speak for themselves.
According to the ATO, there are 610,000 Self Managed Super Funds (SMSF) that have an average value of $1,500,000 per fund. SMSF’s are the type of fund that can hold investment property. Compare that to the average super balance at retirement of approx $330,000. That’s a big difference.
Combining 2 parts
Scenario 2 takes a stable, proven and popular wealth creation process (Property), and puts it inside a super fund.
This isn’t some mysterious trick only for the wealthy. It’s a simple idea that’s already being used by many Australians. If you take time to learn about it, you at least have the power to make the choice for yourself. If you don’t know what your options are, you have less opportunities for a better retirement.
The 7% Growth Comparison
In the comparison chart, both super investments have the same:
- $250,000 start balance: A good starting point for property investment
- 7% growth rate: A typical average growth rate for stocks and property
- 10 year period: A good point to see the difference between investments
We’ve made this an apples for apples comparison to remove the complexity and focus on the most powerful aspect to owning property in super – growth on a bank funded property.
In Scenario 1 – the ‘Super Balance’ column shows a 7% annual growth rate, based on the start balance of $250,000 in the super fund.
In Scenario 2 – the $250,000 that you have in super is used as an initial deposit for a $550,000 property. So the 7% annual growth rate applies to the property – not the deposit amount.
The ‘Property Value’ column shows the value of the property based on a 7% annual growth rate.
The ‘Property Equity’ column makes the assumption that the mortgage ($300,000) stays the same and is not paid off, so it’s only considering the difference between the new property value and the initial $250,000 each year.
The Comparison
In this example, after 10 years the super balance on the typical investment is $459,615, yet the property equity result is much higher at $711,153. There is no magic to this. It’s the simple power of using leverage (the banks money) to get the growth benefit on a $550,000 asset, instead of growth on a $250,000 asset.
However…
Everyone’s situation is different, but any of the following points could dramatically increase or decrease the actual result:
- Time: You may have more than 10 years until retirement. How much more could the property value grow in that time?
- Super Balance: You may have more than $250,000 in super, which may allow you to consider a property of higher value. 7% growth on a $800,000 property will create more wealth than 7% on a $550,000 property.
- Property Research: With the help of professional property research, you could buy in an area that has better growth potential to begin with.
- Mortgage: You could pay down the mortgage even faster by using the rent plus your super contributions. The higher your contributions, the faster you could pay out the mortgage.
How could these two scenarios apply to you?
Your Scenario 1
- If you’re in a traditional super fund, what does your retirement look like based on your progress so far? (Your super fund should have a calculator or chart to help you work this out.)
- What annual income does that provide for you in retirement?
- Are you happy with the lifestyle this would provide for you?
- Are you on target to reach the Australian average of $330,000 in super – how do you compare?
- Have you considered where your retirement future is headed?
If you’re not happy with that, you might have time to make choices now to improve your outcome.
PS – If you’re wondering why the average Australian super balance of $330,000 is lower than the balance of $459,615 in our example chart, it could be because:
- Most Australians don’t have $250,000 in super at age 55; or
- Super funds are not getting anywhere near 7% growth rate; or
- Stock market crashes dramatically reduce super balances over time
Your scenario 2
- Do you now think there may be potential for you to improve your superannuation outcome by investing in property?
- How much time do you have before retirement?
- How much would property value grow in that time?
- Do you think it’s possible for you to achieve the average SMSF fund value of $1,500,000 by the time you retire? Would you be happier with that?
- Would property investment give you a better result and more options in retirement?
The Comparison
- Given a lifetime of working hard for the lifestyle you’ve built, will your current super fund performance match your retirement expectations?
- If not, do you need your super to work as hard as you do for a better outcome?
- Will your super work harder with a property investment or with a typical industry super fund?
Client Performance Examples
It’s one thing to talk about the possibilities, but it’s also very helpful to review actual client results. We’ve selected 3 clients that demonstrate the the growth potential with property.
We’ve intentionally not used properties that are 7-10 years old because the results do look incredible, and that can feel unreachable. We’ve selected properties that have done well over the past 3 years in South East Queensland.
When considering the equity growth, just remember this was achieved in just 3 years. How long would it take for you to add these amounts to your current super fund?
In addition to these results, each of these properties have seen $160 – $200pw rental increases. This gives them an additional $8,300 – $10,400 per year in rental income than when they started 3 years ago. This goes a long way to covering costs and building more wealth.
Beyond The Basic Comparison
Of course, the comparison we’ve made here is simple in order to communicate the benefit of leverage. That’s because it’s one of the most important concepts to understand with property investment in Super.
The following points have not been covered, and they will affect the outcome differently for every person:
- Rent (and rent increases)
- Super contributions (single or couple)
- Tax benefits unique to super funds
- Property details
- Growth rate cycles
- Set up and administration
- Mortgage payments and interest rates
If interest rates are higher but if you have a larger deposit, it may not be all bad news. If you’re paying down the mortgage with rent PLUS your super contributions, you’re paying out the mortgage faster. By doing this, the interest paid over the life of a loan should be much lower regardless of the interest rate.
And … if you are paying out the mortgage faster, after 10 years you should have a much lower loan balance (or no loan) and greater property equity than we’ve demonstrated in our comparison.
There’s a lot to consider, but if you have professional guidance and education to get you there, setting up property investment in your super can be easy and exciting.
Do you think having a detailed report on all set up costs, running costs, income and estimated returns would be helpful for you decide if adding a property to super would work for you?
