We’ve made it to part six in our series exploring the six reasons why people choose to invest in property through their self-managed super funds (SMSFs). Today, we’re looking into one of the most powerful tools available to SMSF investors: gearing.

What is Gearing?

Gearing is simply another term for taking out loans to buy assets—specifically, property in this context. The key advantage of gearing is that it allows you to leverage your existing super balance to acquire more assets than you could by paying in full with cash alone.

Imagine you have $200k in your super fund. Without gearing, you could invest that $200k directly and own $200k worth of assets. However, with gearing, you could use that $200k as a deposit and borrow additional funds to acquire, say, $500k worth of property. This means you’re now controlling a much larger asset base, which has the potential to grow in value over time.

Dual Borrowing Capacities: Super vs. Personal

One of the unique aspects of gearing within an SMSF is that it operates independently of your personal borrowing capacity. This means that if you’ve maxed out your borrowing ability outside of your super, it won’t impact your ability to borrow within your SMSF, and vice versa. This separation allows you to expand your investment portfolio more effectively, utilising resources that might otherwise be unavailable.

A Real-World Example

Let’s look at a real-world example to see how powerful gearing can be within an SMSF. A couple of students from Teach Me About Property joined a few years ago with around $330k in combined super. They decided to set up an SMSF and use gearing to purchase two investment properties in Queensland.

Here’s how it played out:

  • Initial Super Balance: $330,000
  • Property 1: Purchased for $576,500
  • Property 2: Purchased for $515,500

In total, they leveraged their super balance to acquire $1,092,000 worth of property assets. Over the next three years, these properties were in prime locations, and their values increased significantly:

  • Property 1: Increased from $576,500 to $925,000
  • Property 2: Increased from $515,500 to $892,000

Today, their combined property portfolio within the SMSF is valued at $1,817,000. This remarkable growth in value illustrates the potential benefits of introducing gearing into your SMSF.

In just four years, this couple turned their $330,000 super balance into nearly $1.87 million in property assets. Gearing enabled them to control a larger asset base, benefit from capital growth, and ultimately build a more substantial retirement nest egg.

Wrapping Up

It’s been fantastic sharing these insights with you over the past few days. We hope you now have a better understanding of why so many people are turning to property investment through their SMSFs and how strategies like gearing can supercharge your retirement savings.

Remember, everything we’ve discussed is educational—it’s all about helping you explore opportunities that might work for you. As always, consult with financial professionals before making any major decisions.

Information from Teach Me About Property is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).