Monday, November 25, 2024
In this 3 min article, you'll learn;
- Why normal super isn't getting Australians to a comfortable retirement
- How SMSF's enable the use of leverage
- What leverage is, and how it's so powerful
- Using leverage in context of your goals
- A real life example of leverage at work
Many Australians assume their superannuation will be sufficient for retirement, often without closely monitoring its performance.
However, statistics reveal that the average super balance at retirement ranges between $250,000 and $330,000.
Over a 20-year retirement, this equates to an annual income of approximately $12,500 to $16,500, necessitating reliance on the age pension (around $24,000pa)
This raises the question: Is this level of income what you want for your retirement lifestyle?
In a typical super fund, your money grows based on your contributions and the fund's investment performance.
These funds generally do not borrow money to invest, meaning growth is limited to your own contributions and the returns generated by the fund.
This approach may seem standard, but it's not the only option available.
Since 2007, Australian tax laws have permitted borrowing within super funds to invest in property.
This strategy has gained popularity, with the Australian Taxation Office reporting that there are approximately 650,000 Self-Managed Super Funds (SMSFs), each holding an average value of $1.5 million.
SMSFs can include investment properties, offering a pathway to potentially greater wealth accumulation compared to traditional super funds.
Makes sense, but most people then wonder - so how does it work?
Leveraging involves using borrowed funds to increase the potential return on investment.
Leverage is borrowing to have more capital to invest, even if you don’t have all the money upfront—it’s borrowing to boost your potential returns.
In property investment, this means borrowing money to purchase the property, allowing you to benefit from the property's total value growth, not just your initial deposit.
This strategy can significantly enhance your investment returns over time.
So what does that look like?
There’s a lot of numbers involved, but we’re going to break it down as simply as possible.
Leverage is like giving your money a boost, helping it work harder and grow faster. Let's look at an example using 10% growth, for nice even numbers.
Scenario 1: No Leverage
In a regular super fund, if you have $100,000 and the market grows by 10%, being $110,000 - a $10,000 increase.
Scenario 2: Using Leverage in Your Super
With an SMSF, you could use the same $100,000 as a deposit to buy a $500,000 property. If the property grows by 10%, it increases in value by $50,000, making it worth $550,000.
So what does that really mean? You still only invested $100,000, but using leverage you returned $50,000 - a 50% return on your initial investment—not just 10%. That’s $40,000 more growth than in Scenario 1, simply because leverage allowed you to invest in a larger asset.
That’s the magic of leverage—it amplifies your growth potential!
Factors Influencing Your Investment Outcome
Several factors can affect the success of property investment through your super:
Consider your current super balance and retirement goals. If you're not satisfied with your projected retirement income, exploring property investment through your super could be beneficial. It's essential to assess your financial situation, investment knowledge, and risk tolerance. Consulting with financial professionals can provide personalized advice tailored to your circumstances.
Client 1 purchased a property in Coomera during March 2021. They used $195,100 from their super as the deposit.
The property has grown in value from $435,000 to $695,000. That’s $260,000 growth in equity.
The growth for this property has been 59.77% over 3.2 years. An outstanding result, and well above average. That’s equivalent to an approximate 17% annual growth rate. Stunning!
When you consider that the client used $195,100 from Super as their deposit, and now have an additional $260,000 in equity growth, their super investment grew by 133%. That’s equivalent to a 32.5% annual growth over 3.2 years.
When was the last time you saw that kind of growth in a traditional super fund in one year, let alone averaged over 3 years?
But this story doesn’t stop here!
When the client purchased the property they rented it out for $470 per week. The current rental estimate is now $670 per week. That’s an additional $200 per week or $10,400 per year in rental income.
To put an additional $10,400 a year into Super via your personal income - you’d need to receive a pay rise of approximately $94,000 per year*.
This is an extra-ordinary result. But as you’ll see in our other client results - the research our team has done has been well worth the result for all clients.
*Based on 11% Superannuation contribution rate
This is the result of just one of our clients. If you'd like to see what 14 other clients have achieved - see our full article here
While traditional super funds offer a straightforward approach to retirement savings, they may not provide the growth needed for a comfortable retirement.
Investing in property through your super, utilizing leverage, can potentially enhance your retirement savings. However, this strategy requires careful planning, a clear understanding of the associated risks, and professional guidance to ensure compliance with superannuation laws and alignment with your retirement objectives.
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* This post is for educational purposes only and is not intended to be financial advice
* All information presented are from actual client results
* Results from past performance should not be considered a guarantee or indicator on future performance
* Property in a super fund can only be used for investment purposes. Neither you or your family can live or holiday in the property
* Valuation & rent estimates taken from RP Data
* Annual growth estimates are approximate and based on total period growth
*Ownership periods are based on days owned
* Investment growth is based on the deposit taken from Super and does not account for expenses or super contributions
Articles by our team and partners
The Able Investor provides educational information on property investment within super funds.
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