Fractional Property Investment provides hundreds and thousands of young Australians with the opportunity to put their money to work in the real estate market.
Previously, anyone looking to start on the property investment ladder would need to have raised capital (AUD) in the region of around $30,000. This clearly represented a major barrier to entry for a lot of people.
With fractional real estate investment, investors can enter the property market for as little as $100! Naturally, the lower risk does translate into a lower reward. But, with shrewd investment, young Australians can find themselves able to raise a substantial deposit for their first home.
Better yet, it’s not even entirely necessary to be a shrewd investor at all. Three fractional investment companies are currently operating in Australia, offering advice to anyone looking to invest in the property market in a new and innovative way.
So what is Fractional Real Estate Ownership?
When people think of fractional ownership, they may well be referencing the model of timeshare. On that model, investors share a property, and each gets allocated blocks of time in which they can use it.
This can prove to be a useful model for people who travel to hotels around the world at least once a year. But it should not be confused with fractional ownership, as no one in a timeshare contract actually owns the asset.
With fractional property investment, the value of the property is divided into what we will call ‘shares’ – each property investment company has their own terminology, so ‘shares’ can serve as a generic term.
If, for example, a property has a market value of $1,000,000, then the fractional investment company will divide that into 10,000 shares, each with a value of $100.
As an investor, there’s no minimum level to entry, so let’s keep the maths simple and buy one share. A year later, that property may now be worth $1.1m, which means that each share is now worth $110. Our investor can ‘cash out’ with his/her $10 profit at any time. The apps made available from the fractional property investment companies make it very easy to do just that.
Naturally, this is an incredibly simplified demonstration of how fractional ownership works. Now let’s take a look at who benefits, how our fractional investment companies operate, plus the considered positives and negatives associated with fractional ownership.
Who benefits from Fractional Investment?
With the opportunity to enter the property investment market for as little as $100, it’s safe to say that anyone can benefit from taking part in fractional ownership. In addition to the profits mentioned above, as no fractionally invested property can be owner-occupied, there is also a percentage of the rental income to be earned as well.
Those investors looking to enter the buy-to-let market will instantly recognise that outright ownership is going to deliver a faster and higher return on their investment, in the short term. But remember, fractional investment helps those investors who are not in the financial position to purchase a property outright.
And there are other benefits to this set up too. Purchasing a buy-to-let property means legal fees, valuation fees, mortgage applications, the time it takes for the sale to complete, in addition to the time it takes to find a suitable tenant. Thereafter, there are management fees and ad hoc repair bills to consider.
Conversely, fractional ownership does away with all of those. Using a simple app, investors can purchase shares in a property in a matter of minutes, and any management issues will be handled by the fractional investment company. As for the tenants themselves, one particular company offers investors the first refusal on tenancy in a property. This means that the tenants actually own a percentage of their own home, bolstering their credit score and getting them ever closer to the dream of buying their home outright.
So who are the Main Operators?
Currently, there are three companies offering fractional property investment services in Australia – they are BrickX, CoVesta and DomaCom. Whilst they are working with the same basic principle of fractional ownership, their approaches and range of services do differ.
BrickX purchase the property outright, giving them total autonomy on the division of ownership. They then divide the value of the property into 10,000 equal shares which they refer to as ‘bricks’.
Their investors use an app called Smart Invest, and at this early stage of their relationship with BrickX, they have a choice – they can either browse through and select the properties in which they would like fractional ownership, in which case they use a service called ‘Build My Own’, or they can set a monthly amount on the app and allow the team at BrickX to select the properties for them.
Naturally, the team are not looking for ‘homes’; they’re looking for properties showing real growth potential, and investors have the option to skip months, cancel, or simply make changes that are more in line with their current investment portfolio and strategy.
As managers of the property, BrickX will take care of maintenance and tenancy agreements and fractional investors will see a share of the rental income – taking into account any expenses and fees from BrickX.
When the investor feels the time is right, they can put their ‘bricks’ onto the open market at current market value. Naturally, other members of the BrickX community would be the first to be made aware of the opportunity to purchase more bricks – they may already have a fractional ownership of that same property and are looking to add more, or of course they may be a new investor, looking to see if fractional investment is right for them.
Unlike selling a property, the sale of ‘bricks’ is a swift and painless process – all taken care of within the app.
CoVesta offer a number of different options for investors, and in the field of fractional ownership, there are two that are worthy of mention here.
Their Invest and Rent Scheme enables investors to take fractional ownership of a home and also live in the said home as tenants. Interestingly, what this does mean is that the rent being paid per month is likely to be less than that of an equivalent property, as a proportion of that rent is coming back to the investor; hence it is simply discounted from the monthly rental price.
This also means that, as time goes by and tenants’ financial situation improves, they could be in a position to purchase more shares within the property, thus lowering that rent even further.
Whilst it all seems too good to be true, there are naturally some catches. First, those tenants will never be able to own that property outright. Second, it’s natural that some investors will want to leave, perhaps simply because they need to liquidate their assets. When an investor leaves CoVesta, the property is held in trust for five years.
Throughout those five years, trading on the property can continue in the usual way. At the end of that five year period, 75% of investors vote to hold onto the investment or to sell it.
Of the various schemes available in Australia, the Invest and Rent Scheme of fractional ownership would appear to be the least flexible. When one considers that speed is one of the attractors of fractional investment, being locked into a five-year agreement may not appeal to everyone.
However, this is not the only option for CoVesta investors. One can hand over the reins entirely and become a passive investor. For people with limited knowledge of the property investment market, or for those who simply don’t have time to manage their portfolio in such detail – CoVesta will make the investment decisions on behalf of their investors.
DomaCom was founded by a team with experience of administrating billions of dollars in portfolios, included Self Managed Super Funds. They recognised that a very small percentage of people’s Super Funds – usually less than 10%, included property; hence DomaCom was formed to address what they considered was a problem.
Using their knowledge and experience of equity splitting, coupled with internet technology, they allow investors to operate their fractional investment portfolio in much the same way as they would manage shares in publicly listed companies on the stock exchange.
Investors are presented with the option essentially to crowdfund for a property. Like a typical crowdfunding scenario, once the target figure has been raised, the investment can proceed; hence, the property is purchased.
Thereafter, investors can commit, however, much towards the investment that they want. The property is then divided up into units that are proportionate to the investment amount made by the property investor.
A visit to DomaCom’s website will confirm that fractional investment is just one in a number of investment opportunities that they make available to their investors.
Positives and Negatives
The most positive aspect of fractional ownership is its removal of the well-known barrier to entry that many people experience when first looking to invest in the property market. For less than the price of a weekly grocery shop, they can become property investors.
Added to that is the sheer liquidity of the whole arrangement. Selling a home in order to realise capital can take months, and one cannot even begin to put a price on the stress that goes with it. With fractional ownership, investors’ money is not tied up in a specific time period; shares can be sold at any time at realistic market value.
But perhaps the most attractive proposition is that investors can start to build a portfolio of properties with funds that they might otherwise have sunk into one.
Taking the figure used earlier of $30,000, an investor could use that as a deposit on one $300,000 property, or could invest in ten properties of the same value, and enjoy equal fractional ownership across his portfolio, rather than putting all of his/her eggs in one basket.
Beyond that, our investors need to spend no time searching for properties, arranging viewings and negotiating with Estate Agents. They can get their investment into the market sooner and with no administrative nightmares, and then simply allow their fractional investment to work for them.
But of course, we must also consider the negatives here. The most obvious one is the smaller return on investment. Typically, those investing in property have always understood that they were playing the long game. Fractional ownership doesn’t change any of that.
Like any investment – the greater the risk, the greater the reward. If we look at the example of our $30,000 investor above, it could be argued that they are better off putting the entire amount into one property – they are risking a larger sum, but are likely to have calculated the rental income and will have projected to keep the property for a fixed period of time, thus technically lowering their risk.
Splitting a portfolio can, and usually does lower risk, as investors will play across a spectrum of properties, but the return on investment, whilst still profitable, could be a bit of a disappointment.
So Should I Consider Fractional Ownership
Fortunately, the current market is regulated, and with only three operators in the country, investors stand a good chance of being paired with a company who know how to show the best returns for their clients.
Fractional Real Estate Ownership is a new system. Up until now, investors in property have all worked on one business model – purchase a property, generate an income from rent, observe the market and then sell when the time is right – usually because there is a need to liquidate the asset or because the investors feel that it has peaked in value.
Clinging to this old thinking may make fractional ownership present itself as a less attractive option. But consider that fractional investment has been created to help more people enter the property investment market – not as buyers looking for their first home, but as people are who savvy about their finances and recognise the incredible growth potential that is property investment.