When it comes to building your nest egg, it’s all about getting the right combination of your retirement income sources. 

If you have a large sum of money and are unsure whether to put down a deposit on an investment property or put it away in your superannuation fund, there are many factors to consider.

Both have the potential to be a place to park your retirement savings, and each option comes with its advantages and disadvantages. Let’s discuss the differences between these investment options in this guide.

What is an investment property? 

An investment property is a real estate purchased with the intention of earning profit either through rental income, reselling the property at a higher value, or both.

There are several benefits to investing in real estate. If you find the right property that works well with your investment strategy, you can enjoy a positive cash flow, solid return on investment, and significant tax deductions. If you own one investment property, you can use the equity in your current property to grow your real estate portfolio, allowing you to diversify your investment options and build your wealth in the process. 

If you want to learn more about property investment and how it can help you achieve your short-term and long-term financial goals, read here. 

What is superannuation?

Superannuation (often simply known as super) is one of the ways you can save for your retirement. Basically, it is a type of trust where a part of the money you earned during your work life is saved. When you retire, you can access this money that will serve as your retirement income. Employers are required by law to put a portion of your earnings into your chosen or designated super fund, which is managed on your behalf. Super funds then invest your money in various assets with the main goal of growing your balance over time to ensure that you will have a comfortable life when it comes time to access your super.

Super contributions and the safety net of a super guarantee have proven to pay off in the long run. And if you begin to increase your super contributions early in your career, you will harness the power of compound interest, greatly boosting your super balance. 

While super may lack the promise of lucrative gains from investment properties, super funds have shown generally strong performance over the past decade, recording a streak of positive returns. 

Like real estate investments, super also offers significant tax benefits, which the government put in place to encourage Aussies to invest in the fund. While some of the initial tax advantages have since been rolled back, it is still a tax-effective way to build up your retirement savings throughout your working life. 

What to consider when choosing between investment property and super 

Realistically speaking, it is hard to compare super with real estate investments. It will be like comparing an apple to an orange because unlike investment properties, superannuation is not an investment in itself – it is a separate structure for holding your investments.

But some factors can affect both and can help you decide whether to put your money in real estate or contribute to your super. 

Economic conditions

Investment property and super are both highly dependent on wider economic conditions. The performance returns of both can change depending on the economy. 

Super is considered to be a long-term investment, so short-term declines and stagnation in the economy will not impact it considerably unless the economy shows a prolonged period of decline. The long-term nature of super means it is well positioned to ride out any dips and fluctuations in the market. 

Meanwhile, declines in the economy can affect rental income and the value of houses. Like other assets, house prices depend heavily on the law of supply and demand. If the economic outlook is bad, there is less demand to buy houses, which can pull down the purchase price of properties. Lower economic activity (e.g. low employment rate) can also affect rental property demand. 

On the upside, you should also be aware that the property market goes through a cycle of ups and downs. If you can time the property market’s cycle, you can reap bigger financial rewards from property investments rather than investing in your super. However, it requires a solid investment strategy and proper research for it to pay off. 

That’s why when you have investment properties and/or super, it’s best to regularly check the performance of the property market where your property is located and the super fund so you know your money isn’t losing value.

Diversification

Diversification is an important strategy for an investor. It refers to the allocation of investments among various financial instruments to minimise risk. By diversifying your portfolio, you are able to offset any losses if one asset declines. It aims to maximise returns by investing in different areas that would each react differently to the same event.

Superannuation is generally more diversified since it invests in a whole range of investment options. You can also choose your own mix of assets ranging from cash and shares to property and government bonds.

However, you can still achieve a relatively diversified portfolio when investing in real estate. Real estate has a low correlation with other major asset classes. This means that if you have investment property in a portfolio of diversified assets, it can lower the portfolio’s volatility and give a higher return per unit of risk.

Your risk tolerance

When it comes to investing, there is a general principle that the more risk you are willing to take, the bigger reward you will get (if all goes well). Both super and real estate carry risks. What is important to consider when choosing is finding the balance between your risk tolerance and what kind of returns you want to get. 

Because of super funds’ diversified nature, the risk is highly mitigated. Your money is also managed by the fund and it will decide how to invest your money. Choose a fund that has shown a strong performance throughout the years (and despite the market ups and downs) – while past performance is not indicative of future results, a strong track record is a sign of good management. One beauty of a super fund is that it allows you to choose a riskier investment option if you want to do so. 

Compared with other volatile assets such as bonds, shares or cash, property investment is often seen as less risky. If your property is generating income, it can also provide a steady passive income for you. However, there are also pitfalls to investment properties. If you have a rental property, having a long vacancy period will result in losses. A downturn in the property market may also erode your property’s value. You should also take into consideration other expenses needed for renovations and repairs to “flip” or make your property profitable.

As with other financial decisions, weigh your pros and cons. This will also help you determine if you are comfortable with any risk you will take and if it is worth the rewards. 

Your investing expertise

Your level of investment may impact your decision on where you should park your money. Super is managed on your behalf, making it a comfortable choice for first-time investors. If you have no investment experience and you are not keen to learn more about investments, it could be best to just put your money in your super instead of buying an investment property. 

However, if you are a rookie investor with some investment experience or you are willing to do your due diligence, the investment property market is a good starting point for you. Several government programs can help first-time home buyers acquire their first property and the tax benefits (if properly claimed) that can make the process worthwhile. But because it is a long-term investment, make sure to stay engaged and to have a thorough plan on what you want to achieve with your investment property. 

Your age matters

Your age is an important factor when determining if you should invest your money in a property or put your money into your super. 

There is no defined age limit as to when you can invest in real estate. But the sooner you do it, the more opportunities you will have to make money – and your investment will last longer. With investment properties, patience is the key to success. The earlier you invest, the greater your eventual profits, thanks to the power of appreciation over time. If you are planning to get income from a rental property, an early start can help you jumpstart your cash flow. Theoretically, investment properties are a long-term investment if you want to make a decent return, so investing in property when you're about to retire may not be a good idea. 

With super, you have to wait until you retire before you can access your benefits. So, if you are looking to get your returns immediately or sooner than later, it may not be the best option for you. But if you are more inclined towards saving for a more comfortable retirement without much effort, putting your money into super may be a better way to guarantee safer returns. 

Different strategies work for different people

If you’re in the early years of your work life, putting more money into your super can help to ensure that your retirement will be what you picture it to be. At the same time, you don’t want all your money tied up in one place where you can’t access it until you reach your preservation age. Meanwhile, investment property offers several advantages that you can’t get from putting your money in your super.  

The truth is that super and investment properties offer different advantages to different people. In the end, your best investment strategy depends on your circumstances – your age, your financial position and your goals.