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Hosted By Daniel Walsh

Superannuation Funds in Australia: How To Turn $150,000 Into $2M

Updated 22/06/2020

Daniel Walsh is a successful property buyer’s agent and founder of buyer’s agency, Your Property Your Wealth. His company has been helping clients build and improve their property portfolios and he is generous enough to share some of the stories with us through these special episodes of Case Study.

Join us as we delve into the topic of superannuation funds in Australia and we discuss how they work and how to set them up, we find out about some of the advantages you can receive when buying properties and some of the risks of using one as well, why it is not as popular these days as it used to be, why starting one at an early age can have its benefits, and much much more!

'Putting into your self managed super fund, the younger that you are doing this, the better you'll be.'

Daniel Walsh

In this episode, we are discussing the topic of self-managed super funds and we start off by hearing about one of Walsh’s clients and their background. 

I was working with Emily and Matthew for the last sort of 18 months or so. Now they had already sort of had their own family home. They're in their late twenties. They've sort of established their careers. So we've got Matthew who was a police officer. Emily, she works in admin. They have two children as well, so they've sort of built their family. They've got their family home that they want to live in and they, you know, want to live in that for the next 20, 30 years. That's sort of their long term family home. But they wanted to build wealth and they wanted to do that I guess outside of super and also inside of super as well. So I guess it was coming up with a strategy for their incomes and for their lifestyle to be able to build that property portfolio.

Did they know that they wanted to start investing into property at that point in time or did they come to you to sit down and work that strategy out?

It's around 18 months since they came to us, they already had their principal place of residence in Sydney. That property market that they were in at that point had some good capital growth and they had quite a bit of equity in their house and they built the house themselves. And I guess at that point they knew they had equity, they knew they wanted to invest but they had no idea on strategy. They had no idea where to invest at the time of coming to us. Obviously, with the Sydney market and where they lived, it was quite expensive. So they knew that they wouldn't be able to purchase something in Sydney. It was out of their price bracket and also they were quite a nervous investor. So they, you know, just sort of jumped into this investment world and they didn't really want to go out there and purchase a, you know, $800,000 to a $1 million dollar house. They wanted to, I guess, be a little bit more conservative and build their portfolio with maybe $300,000 to $500,000 houses. So that's when they come to me to sort of say, “You know what, we know we need to buy something interstate. And I have no idea where to even start with that.”

We find out about one of the specific issues that the client faced and how Walsh helped them through it. 

It was probably more so Emily, when we first had a chat, she was speaking with me and saying, you know, she wants a good looking home. That was one of the big things, she wanted to have a really nice looking home. She didn't want to have a bad tenant wreck that house. So I guess they were coming from an emotional side of things looking at this going, we almost want to buy a second family home and we don't want the tenants to have any wear and tear on that. We don't want the damage. We don't want them to ruin that house. So I guess what we had to do is sort of take a back seat with them and say, you know what? We need to be building this portfolio from a business side, not an emotional side. This isn't your family home.

You have your family home. We need to understand that when we build the portfolio that it's not about what you want, but it's about what the market wants. And then looking at where is the best opportunity for you right now to get good capital growth and a good rental return for that market. And again, each market's different. A house in Sydney might be very different to a house in Brisbane or a house in Melbourne. They have different quirky sorts of things and what people are looking for in those different markets. So again, what a lot of people do is they come to buy an investment property and if it comes interstate, they're looking at what they want. And that was when we had to really come back and say, I know that you want what you want, but we need to look at what the market wants.

superannuation funds in australia

Walsh delves into the intriguing decision for his clients to jump into a self managed super fund so early on in their journey. 

We jumped into the first property in Brisbane. And again we went into a market for about, I think the first property we paid $339,000 for the property. We had the idea of buying something with a higher rental return of say 6%. So we got $400 per week for that property, so a 6% rental return. And again, the strategy behind the first property was to have a really good rental return. They were nervous investors, they were nervous about the cash flow side of things as well. Again, they've got a young family, they want to know they can pay the bills. So we went for a little bit of a higher return when we set up everything for them to purchase. What we did first was, the equity from their house. They had $340,000 worth of equity that we could extract.

The first thing we did was we kept a $100,000 buffer. They were quite risk averse. They wanted to know that if anything was to go wrong and someone lost a job, can they pay their bills and what's their survival rate basically? So we put $100,000 aside for them straight away and then we allocated the rest of the money for deposits for the first two properties. So we bought a good cash flow property for the first property. And again, the aim for that is to, I guess that's probably one of the properties that they would retire in because it is the higher cash flow property. And then from there we sort of went to a property with about a 5% rental return. But that was a good balance between I guess a capital growth play and the cash flow play as well.

It's not costing them anything to hold, but they're also going to get some really good capital growth out of that property to balance the portfolio once we purchase the second property. And again, the higher yields were because of income strains as well. So, you know, the incomes were huge to be able to build a massive portfolio and they did want to build the largest portfolio that they could. But they also recognize that they, you know, with the incomes that they need to increase incomes over time. So we were conscious of the rental returns as well as we were building this portfolio. But by the second property we realized, you know, to get to the third property, self-managed super fund, they had already had a fair bit of money sitting in their super and we knew that we could access their super to be able to continue to purchase in their super fund. That was something that we had already talked about before. They even purchased their first few properties. So it was to be able to get into the third property basically straight away after that. So we purchased two properties and now we're looking at the third one.

We discuss why people might look to set up a self managed super fund and some of the advantages that comes with it. 

It really comes down to a personal preference. I know that, you know, a lot of people aren't familiar with shares. They don't feel comfortable being in the share market or having a super fund that they can't control. So they're looking for more stability. A lot of people understand property. They don't understand the share market. So they're going, you know what, maybe I want to put my money somewhere that I know where it's going to be. It's going to be a more stable asset. We're not going to see the massive swings in the market and we know that will grow over time. Now, one of the other big things is obviously when you're purchasing property is the leverage. Being able to, you know, use $100,000 worth of super and go buy a 400,000 or $500,000 property and then get a better capital return over that period of time.

superannuation funds in australia

But also being able to pay down the mortgage because generally in your self managed super fund, when you're buying into super you generally are forced to pay principal and interest. So they know that, as they're putting their money into the super, it's paying down the loan. So they're reducing their balance and that's compounding down, but they're also getting the benefit of the growth, which is compounding up. And instead of just getting a return on say, $150,000, you know, 8% per year or 6%, 10% per year, they can now go buy it or control an asset worth 450,000 to $500,000 and they're going to get say a 6 or 7 or 10% return over the next 20-30 years on average on that asset. So they're going to get a much better return because of the leverage that they're using.

Now we delve into the other side and we find out about some of the risks that come with superannuation funds in Australia and what you might not be aware of. 

I think one of the big things is to understand and have a good team in place that has done this before. So when you're purchasing you need to understand as well where you're going to purchase, what you're going to purchase and why. So one of the big things with the superannuation funds in Australia is they're going to assess the property that you purchase. So they may want you to put a 30% deposit down rather than 20% and that comes down to the area that you're purchasing it. They may stipulate a higher deposit, so you might be able to check with your broker straight away before you even purchase. I'm looking to purchase around here. What're the requirements for a deposit for that area? That way they can work out roughly, can they afford that? Does their super have that much money left in there to be able to go out there and purchase a property?

One of the other big things as well is, you know, a lot of people think that they can just go buy a property with their self managed super fund, control that asset, go live in there, do whatever they want. There are rules and regulations. This is an investment. This is still your super, you can't just go live in the property. You can't just go renovate the property with your own money. Everything has to be done and audited in the super. So if you wanted to go out there and renovate the property, your money has to actually come out of the super fund. So your self managed super fund where your money is held, that has to come out and it has to be recorded on what you've done to the property so that you can correctly allocate it and say, okay, I've renovated the property and this is where the money's come from.

You're not going to be putting your own savings into that property. That's a big no-no. The other thing is as well as the property has to sustain itself, you can't be chipping in. If it's making a loss, let's say it's a highly negatively geared property. You can't be just chipping in your own money to be able to prop that up. When they assess that this asset is going into a self-managed super fund, again, the banks have still got to approve this. You've got to look at it from your super and say, okay, what am I contributing to my super? What is the actual asset in cash flow? Because you've got to be paying principal and interest. So the cash flow, you know, you might want a higher cash flow property to be able to sustain that because you're not going to be just chipping in your own money and paying down the loan.

superannuation funds in australia

It's going to be all coming out on the self managed super fund. So self managed super funds and buying property in your self managed super funds is a great way of creating wealth and it's a great stability asset to be able to put your money into. But you need to recognize these smaller things and realize that you do have to be audited every year and that you do need to set it up correctly. You need to make sure you know how you're setting up. There's two ways to set it up so you can either set it up online or you can go to say a financial advisor and an accountant and they can help you set up the self managed super fund as well.

It's so important to actually understand that correctly because it's not like just, you know, you have a self managed super fund set up and you just go and buy the property. You actually have to set up so many different aspects as well because you can't just apparently buy a property inside your self managed super fund just like that. You have to set up all these other structures as well too, which is an additional cost. And that's the other thing when you go into a self managed super fund, you've got to consider all the additional costs that might be involved. And if you're only going to be generating maybe you know, a few percent per annum to cover the cost of running the self managed super fund, it might not be worthwhile. But if you're going to generate more than say 10, 15%, then it might actually be something that you consider.

And that's something I personally had to go through because I asked myself, should I actually pull out my money from one of the super fund institutions that are currently out there. And, you know, put it into my own self managed super fund where I have a little bit more control but the cost of running it on a yearly basis, you know, you have to work out if it's going to outweigh that and get a better return. And personally I've done that obviously for certain reasons because I'm investing into property as well too.

I think as well with setting it up, like I said, there's the two ways to set up. You can go set it up online yourself, you can go through different entities like Squirrel and different places like that. So setting it up yourself online, if you know what you're doing or you have somebody that you can I guess run off so you know, maybe a mortgage broker or somebody that does this day in, day out, they can help you set that up online. The cost of doing that is quite low. So you could set up a full self managed super fund and then go out there, get your pre-approval with the banks, get ready to purchase, and you could set that up for maybe 800-$850 or you can actually go to financial advisors and accountants and they will go through and set up the entity for you and make sure everything's right and they go through the financial advice. But that can run anywhere from say 3,000 to $6,000 to do that. So you've just got to look at your risk profile and say, am I comfortable with doing that myself or do I want somebody to look over everything and set it up for me? The costs are very different to look at both ways.

superannuation funds in australia

Once you have purchased a property in your self managed super fund, Walsh explains what are some of the next steps that you need to take.

You can't purchase and use the whole $160,000. The requirements will be that they will want a percentage of that leftover in the self managed super fund for things that go wrong with the property, for vacancies, all that type of thing. So they still want to know that. It's the same as building outside of super. They want to know you have a buffer and the buffer has got to be inside super, so you're not going to spend the whole amount. Now what we're aiming to do with these clients was put down a 20% deposit, so a 20% deposit, obviously the stamp duty, legal and settlement fees. And then we're going to go out there and purchase a property roughly for around $450,000 in a good capital growth location, but also balancing out the yield for I guess the cash flow side of things for around about 5.2% rental return.

So where do you start?

I mean the first thing you've got to do is work out is a self managed super fund for you. And that's getting the advice around that. Obviously it's going in and saying, okay, how do I set this up? Do I have enough money? Typically around $150,000 is about the minimum that you would need. You can combine that obviously with your partner as well. So if you're married and you have a partner, you can combine your supers together. If that is you know, $150,000 or more, you can then go use that, set up a self managed super fund with a financial advisor or if you wanted to go do it yourself online, you could do that as well. And then from there you need a good quality mortgage broker to be able to source your loan because there are very few lenders that are actually doing this now. So maybe three to five years ago there was a lot more opportunity to be able to put properties into the self managed super fund. It is becoming a lot stricter. There are fewer lenders that will, you know, have that risk appetite to be able to put that into a self managed super fund. So having a good mortgage broker on your side to be able to navigate these rules, regulations, set everything up, ready to go get your pre-approval, to go out there and purchase. That's vital.

We delve into why it has changed over time and how there are not many lenders that actually do self managed super funds.

I mean there are a couple of reasons. I think one of them is, you know, that maybe the advice that people were getting, they didn't really understand what they were getting themselves into to be able to purchase. So the complexity of, you know, this entity and purchasing and property was a bit tough for a lot of everyday people to be able to go in and purchase. I know that it's become a lot harder to put, you know, let's say commercial buildings and stuff like that into your self managed super fund. It's a lot harder to be able to do that. Maybe from a risk perspective, they know that maybe that's a little bit higher risk and they don't want that, so they want more safer assets. So if you go out there and want to buy a six pack of units or something like that and put that into the self managed super fund, that's a lot harder to do these days.

So I think just from a perspective of they just want a good quality asset that they know is going to tick over time. Your nice family home, owner occupied sort of house. Those types of properties are quite easy to put into your self managed super fund. Once you start getting a little bit trickier and you start putting the commercial side in, you start putting, like I said, the six block of units on one title and you want to put those into the self managed super fund, that's when it becomes a lot harder to do that. And you would need to put, I guess a lot more of a deposit down. You might be then putting 30 or 40% deposit down.

And with self-managed super funds and buying in your self managed super fund, it works differently than buying outside. So if you're buying just outside of your self managed super fund, you're just buying in your own name. So you're buying in a company, you can then go out there and build upon the equity so you can leverage upon the equity from other properties. So you can go buy a property, it goes up to $100,000, you extract the equity out, you go out there and you leverage upon that property to go buy a second one and you can just do that so forth, right? You can build a portfolio doing it that way in self-managed super funds, very different. You can't have the equity and then leverage upon that equity to go into a second and third property. So, you know, like you were saying, putting all your money into it, you might not necessarily want to do that. So you might put a 20% deposit down and you pay your minimum P and I, principal and interest repayments. But then on the side, you might be stashing away the rest of your money that you are contributing in super to be able to build up another deposit to buy a second one into the self-managed super fund because you know you can't leverage from the first one.

The quicker that you set up a self managed super fund at a young age the better it is, and Walsh explains why. 

I think as well, like putting into your self managed super fund, the younger that you are doing this, the better you'll be because obviously you're accessing the leverage from buying, you know, putting $150,000 into buying a $500,000 asset. And you know, if you held that for 30 years before you could even access that. In terms of, you know, getting ready to retire, you would have paid that property off. It would be creating you the cash flow, which would then, you know, maybe putting you into a second property. So it might be 10, 15 years from now where the rents have doubled over that period of time. The property has doubled over that period of time. You've paid down a fair sum of that balance and now all of a sudden you're creating positive cash flow at that point where you can be paying that down at a rate of knots and instead of taking 30 years to pay that off, you might be paying that off in 15, 20 years. But let's say that you get to the end of your retirement, you're ready to retire, you’ll own the asset, it'll create you cash flow and that asset, you know, originally might've been worth $500,000 and it went from 500,000 to 1 million and then 1 million to $2 million. So if you've leveraged from 150,000 to $500,000, the compounding effect over that 30 years is much greater.

The other point I just wanted to raise as well too is a lot of people, especially in the younger generation, don't think about super because it's something that automatically gets taken out of your salary or out of your wage and just put into this hidden fund I guess. And then it's only when you reach a certain age, that's when you go, oh hold on, this super is actually accumulating. Because even though I have spoken to people who started working at a very young age from like early twenties and stuff like that and now they're about 40, they go wow, you know, they've actually accumulated quite a substantial amount of super in there because all of those years they've been just putting money aside. And I've known a few guests from past episodes, I've interviewed them and they've actually taken that money and invested it into their own commercial properties, which they actually work out of.

So it actually could be a potential benefit if you're running a business and that you're looking for a space that you can actually pay your own self rent within and I guess manage your own property there. Then putting it in a self managed super fund is actually a very smart option because it is legal to do that. So as I was saying, if you're running a business or you're running anything that you want to actually purchase a property for that business, you can actually put them in a self managed super fund and then you, as the business owner, would be paying rent to the self managed super fund and essentially you get to keep all that within.

It is a good strategy to do that. I know a lot of business owners that do that, so I guess that they're not paying rent to the commercial owner or the landlord. They're at least paying it to themselves, which is going into their circle, which is going to help for when it comes to retirement, that they're going to own that asset at retirement rather than just paying rent and not really owning anything at the end of it.

And I think if you do run that strategy and you do want to purchase your own commercial building there, you’ve also got to almost forecast where your business is heading because you don't want to outgrow that space. You want to be able to stay in that for the long term so you can continue with that same strategy of paying it down and instead of, I guess two years from now going, oh, I don't really need that commercial space or I need a bigger commercial space to be able to house my business. So I think, you know, when you look at that strategy, you've got to look at it from a long term perspective as well.

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