Superannuation is there to fund your retirement. This is the longest-term goal an investor can have. Given the decades-long time horizon of residential real estate it is no wonder that many invest a portion of super in property.  The astronomical price increases of property has created wealth for many Australians through their primary place of residence - their home. Why not extend the strong returns to your retirement nest egg, too?

There are nuances to investing in real estate through your super. There is a litany of costs and benefits to consider, as well as risks that need to be weighed up. It’s important for investors or potential investors to be aware of the common pitfalls and risks.

Concentration risk

According to the Australian Bureau of Statistics (ABS), the average house price in Australia is $959,300. The average super balance is $190,716 for men, and $142,037 for women (aged 45-49, full list available here). Of course, property within super works like it does outside of super and you are able to purchase a property with a deposit. Still, the deposit for a property will likely be a large chunk of your retirement savings.

This is not just putting all your eggs in one asset class, but it is in one asset. You need to be sure that you are confident about the investment prospects of this asset and that you understand risks.

Part of this is understanding that there may need to be an exit strategy for the asset. Unlike other investments like equities, you can’t just sell the kitchen to fund some new tyres or a holiday. At some point in your retirement (or before), you will have to sell the asset to access the capital. This isn’t always a risk, but it will form a meaningful part of your investment strategy.

Real estate is just like any other asset

Real estate is just like any other asset and there is the potential that your investment will depreciate in price regardless of what the media and property worshippers will tell you. This is especially true if you do not purchase an investment property in the mindset that it is an investment, and not a place for you to live. I spoke to one of Australia’s leading buyer’s agents and asked about the best ways to mitigate this risk, but also the considerations when choosing a successful investment property.

Just like any other asset, there are times where it may not be doing well or providing consistent cashflows. You may have an untenanted property due to unforeseen circumstances; you might have unexpected repairs.

Part of the reason why investment properties have been such a good investment in the past is due to tax policy. Capital gains discounts and negative gearing have provided a significant boost to returns and made these investments attractive to investors in higher tax brackets. These policies are not guaranteed. As part of the risk assessment, understand what would happen to the investment if these policies did not exist anymore, and whether it would trigger a forced sale.

We have seen in the past couple of years that higher interest rates can cause investors stress. It has a direct and major impact on your investment returns if you are on a variable rate loan. There is a cost to the leverage that you take on in your investment and it could lead to poor investment returns or a distressed sale.

SMSFs cost money to run

Purchasing residential property through your superannuation requires you to have a Self-Managed Super Fund (SMSF) Your superannuation balance has to make sense to open an SMSF as there are multiple fees, including flat fees, that may significantly detract from your fund performance.

I’ve written an article about how much an SMSF costs, and a checklist to go through before you consider opening one. There are some thresholds in this article that give a general guideline of what makes sense.

The article about the cost of an SMSF also contains a free spreadsheet where you can input your details and understand the costs of an SMSF vs an industry superfund, vs a retail superfund.

Tax implications

I leaned on insights from Andreas Kyriacou, who specialises in investment property tax to provide some factors that should be front of mind for investors that have, or are considering, an investment property within super.

SMSF property factors

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