Some love it so much that they believe property is a better option for providing a retirement income. They see a bricks and mortar investment as a more tangible and solid approach than say, superannuation, preferring to take their super as a lump sum on retirement to buy property. They may also choose to invest a windfall, such as an inheritance, or the proceeds from downsizing the family home, in property instead of their super.
So, given that a retired couple above age 65 needs an estimated yearly income $73,337 to lead a comfortable lifestyle, could a property investment do the job?ii
While it’s true that a sizeable property portfolio could deliver rental income to equal a super pension, it might mean missing out on some useful benefits.
After all, super is a retirement savings structure with significant tax advantages. It also has the flexibility to provide investments in a range of different asset classes, including property.
Meanwhile, super fund performance has, generally speaking, outstripped house price movements over the past decade. Super funds (invested in an all-growth category) returned an annual average of 9.1 per cent during that time while average house prices in Australian capital cities grew 6.5 per cent per year over the same period.iii, iv
Is it better to invest in super or property? This age-old Australian debate heats up every time tax season rolls around I’ve spent countless hours analyzing both options, and I’m gonna break down everything you need to know to make the right choice for your financial future.
The Great Australian Investment Dilemma
Australians have always had a love affair with bricks and mortar. It’s no secret that our housing market is worth a staggering $8 trillion – about four times our GDP and roughly $1 trillion more than the combined value of the ASX, superannuation and commercial real estate! Meanwhile our superannuation system has grown to an impressive $3.4 trillion (as of March 2022), increasing by 9.7% in just 12 months.
But comparing super and property is a bit like comparing apples and oranges. Property is an investment asset, while super is actually a trust structure that holds assets for your benefit. Both have their unique advantages, tax benefits, and drawbacks. Let’s dive deeper into each option.
The Property Path: Leverage, Income & Risks
Advantages of Property Investment
-
Leverage: This is property’s biggest advantage. You can borrow money to purchase something much more valuable than what you could afford outright. Your returns are based on the total property value, not just your initial investment.
-
Rental Income A good property investment provides a steady passive income stream through rent
-
Tax Benefits: Investment properties (not your primary residence) offer tax advantages including:
- Negative gearing (offsetting property expenses against taxable income)
- Depreciation deductions
- Interest deductions on loans
- Rental expense deductions
The Downsides of Property Investment
-
High Entry Costs: You’ll need a substantial deposit, plus stamp duty, legal fees, and other costs.
-
Ongoing Expenses: Maintenance, insurance, council rates, property management fees can eat into your returns.
-
Low Liquidity: You can’t quickly convert property to cash if needed – selling takes time.
-
Market Risks: Property prices fluctuate based on supply and demand, interest rates, and economic conditions.
-
Tenant Issues: Bad tenants or rental market downturns can significantly impact your income.
-
Lack of Diversification: Unless you own multiple properties, you’re heavily exposed to a single asset class.
The Super Strategy: Tax Efficiency & Long-Term Growth
Why Super Makes Financial Sense
-
Tax Advantages: Super contributions are taxed at just 15% (or 30% for high-income earners above $250,000), compared to marginal tax rates of up to 47% outside super. For someone earning over $45,000, contributing to super saves 19.5¢ in tax per dollar contributed.
-
Impressive Returns: Super funds in high-growth options have generated 157% cumulative returns over the past decade, while 100% growth options delivered 169%. This significantly outperformed Australian house prices, which rose 84.3% in the same period.
-
Diversification: Super allows you to spread investments across different asset classes, reducing overall portfolio risk.
-
Compounding Growth: Over decades, even small regular contributions can grow substantially through the power of compound returns.
-
Tax-Free Income in Retirement: Once your super becomes an account-based pension, the income is completely tax-free!
The Downsides of Super
-
Limited Access: Your money is locked away until retirement age, with few exceptions.
-
No Physical Asset: Unlike property, super doesn’t provide a tangible asset you can see or touch.
-
Contribution Caps: Annual concessional contribution limits of $27,500 restrict how much you can contribute at the lower tax rate.
Performance Comparison: Super vs Property
When we look at pure returns, super has outperformed property over the last decade:
| Investment Type | 10-Year Cumulative Return |
|---|---|
| Super (High Growth) | 157% |
| Super (100% Growth) | 169% |
| Australian House Prices | 84.3% |
This shows that superannuation in growth-oriented options has delivered nearly double the returns of residential property over this period.
Which Is Better For You? 4 Key Factors
1. Your Time Horizon
-
Short to Medium Term: If you need access to your money within the next 5-15 years, property might make more sense because you can sell it or borrow against it. Super is locked away until retirement.
-
Long Term: If you’re focusing on long-term wealth building for retirement, super’s tax advantages and compound growth work powerfully over decades.
2. Your Income Level
-
Higher Income Earners: The tax benefits of super become more valuable as your income increases. Someone earning over $180,000 saves 32¢ in tax for every dollar contributed to super (up to contribution limits).
-
Lower Income Earners: The tax advantages of super are less significant, potentially making property more attractive if you can manage the entry costs.
3. Your Risk Tolerance
-
Lower Risk Appetite: Super funds offer diversified portfolios that spread risk across multiple assets and asset classes.
-
Higher Risk Tolerance: Property investment concentrates your risk in a single asset class but potentially offers higher returns through leverage.
4. Your Desire for Control
-
Hands-Off Approach: Super is professionally managed – you select your risk profile, and the fund handles the investments.
-
Active Management: Property gives you control over purchasing decisions, improvements, tenant selection, and selling timing.
The Verdict: It Depends on YOUR Situation
If you want immediate flexibility and the potential for capital growth outside super, investment property might be the way to go, but it comes with risks. If you’re thinking long-term and prioritising tax efficiency, contributing more to your super could be a smarter strategy.
What we’re seeing more and more is that it’s not necessarily an either/or decision. Many savvy investors use BOTH strategies:
- Maximize super contributions to take advantage of tax benefits (up to $27,500 annually)
- Build property investments for growth, rental income and potential tax advantages
- Consider diversified investments outside of both super and property
Smart Strategies for Super
If you’re leaning toward super investment, consider these strategies:
-
Salary Sacrifice: Arrange with your employer to contribute extra to your super before tax.
-
Personal Deductible Contributions: Make additional contributions to super and claim a tax deduction.
-
Catch-Up Contributions: If you haven’t used your full contribution cap since 2018-19, you can access these unused amounts (subject to eligibility).
-
Spousal Contributions: Contributing to your spouse’s super can provide tax offsets while building their balance.
Smart Strategies for Property
If property investment appeals to you:
-
Research Thoroughly: Location, potential rental yield, and growth prospects are crucial.
-
Interest-Only Loans: Consider interest-only loans during the initial investment period to improve cash flow.
-
Depreciation Schedules: Have a quantity surveyor prepare a depreciation schedule to maximize tax deductions.
-
Property in SMSF: For some investors, holding property within a self-managed super fund can combine the benefits of both worlds (though this comes with complexity and restrictions).
The Third Option: Diversified Investment Outside Super
Don’t forget there’s a middle ground. Investing in a diversified portfolio outside of super offers:
- More Flexibility: Access your funds when needed
- Lower Entry Costs: Start with smaller amounts
- Fewer Ongoing Expenses: No property maintenance or management fees
- 50% CGT Discount: For assets held longer than 12 months
- Diversification: Spread risk across multiple investments
My Final Thoughts
There’s no one-size-fits-all answer to whether super or property is the better investment. It really depends on your personal circumstances, financial goals, and stage of life.
What I do know is that starting early with either option (or preferably both) gives you the greatest advantage through the power of compounding. The best investment strategy is the one that aligns with your specific goals and that you’ll consistently stick with over the long term.
Remember that while property has historically been Australia’s national obsession, the performance numbers suggest super has delivered stronger returns over the past decade. But past performance doesn’t guarantee future results – markets cycle, policies change, and what works best today might not be optimal tomorrow.
Before making any big financial decisions, I always recommend getting professional advice tailored to your unique situation. A good financial advisor can help you weigh all these factors and develop a strategy that works specifically for you.
What’s your experience been with property or super investments? I’d love to hear your thoughts in the comments!
The performance of superannuation and property
| Fund category | Growth Assets (%) | 1 Yr (%) | 3 Yrs (% pa) | 5 Yrs (% pa) | 10 Yrs (% pa) |
| All Growth | 96 – 100 | 12.7 | 6.1 | 8.3 | 9.1 |
| High Growth | 81 – 95 | 10.8 | 5.7 | 7.7 | 8.4 |
| Growth | 61 – 80 | 9. | 4.9 | 6.3 | 7.2 |
| Balanced | 41 – 60 | 7.4 | 3.9 | 4.8 | 5.8 |
| Conservative | 21 – 40 | 5.5 | 2.6 | 3.3 | 4.3 |
Not that past performance can give you any guarantees about what will happen in the future. Indeed, the average numbers smooth out the years of high returns and the years of negative returns. More important considerations in making an informed decision are your financial goals, your investment timeframe and how much risk you’re comfortable with.
One of the most significant differences between super and property investments is liquidity, or how quickly you can convert your investment to cash.
With super, assuming you’re eligible, funds can be accessed relatively easily and quickly. On the other hand, if your wealth is tied up in property it may take some time to sell or it may sell at a lower price.
Nonetheless, market cycles affect both property and super investments. They can be affected by volatile conditions and deliver negative returns just at the time you need access to a lump sum.
Superannuation is designed for long-term growth, often spanning decades as you accumulate wealth over your working life. The magic of compounding interest can lead to substantial growth over time, depending on your investment options and the state of the market.
Property investments, on the other hand, can be invested for short, medium, and long-term growth depending on the suburb, the street, and the type of house you invest in. Of course, there are additional costs in buying a property (such as stamp duty) plus costs in selling (including capital gains tax). If there’s a mortgage over the property, you’ll need to factor in the additional costs of repayments and interest (bearing in mind that interest on investment properties is tax deductible).
Investors’ attitudes towards risk also play a role in choosing between super and property.
Superannuation funds can be diversified across various asset classes, which helps to reduce risk. But property investments expose investors to a single market meaning that while there might be a big benefit from an upswing, any downturn may be a blow to a portfolio.
Don’t Buy Property in an SMSF (until you’ve seen this!)
FAQ
Is it better to put money into super or mortgage?
If your contributions to super will be non-concessional (after tax), the only way saving in super can leave you better off financially is if your super return is higher than your mortgage interest rate. However, if you can make concessional contributions, the picture changes thanks to tax savings.
What is the smartest thing to invest in right now?
What is the 2% rule for property?
The 2% rule is a popular guideline that real estate investors use to evaluate the potential profitability of an investment property. Simply put, the 2% rule states that a rental property should generate monthly rent that is at least 2% of the total purchase price.
Can I retire at 60 with $500,000 in super?
If you retire at age 60 with $500,000, you could cover retirement expenses of $43,000 (increasing with inflation) until age 95 if you are single, and $52,000 until age 95 if you are a couple.