Micro-investing: Mark Story Affordable ways to buy property

You don’t need buckets of cash to buy into the market

Given that most Australians only ever own one investment property, the risks of buying at the wrong time and in the wrong location are significantly higher than if they had greater diversification. That’s why owning a smaller piece of one or more quality property investments successfully avoids putting all your eggs in one basket.

The good news is there are many affordable alternatives to stumping up with a 20% deposit for a single property, which based on median house prices is between $100,000 in Adelaide and $224,000 in Sydney.

Shared approach

Co-investing in residential property with some mates is increasingly common for millennials who want to get onto the property ladder. To reduce some of the complexities whenever two or more borrowers are involved, some banks now offer products that isolate each portion of the loan.

One of the added benefits of apportioning mortgages into segments, says Ben Nash, of Pivot Wealth, is that individuals aren’t unduly disadvantaged by being liable for the full amount, which can compromise their serviceability on any additional loans.

To avoid uncertainty around when to sell a property that’s co-owned by two or more investors, another avenue Nash suggests millennials explore is using the value of another property (typically the family home) as security for borrowing.

If that isn’t an option, he suggests assessing the viability of purchasing property on a deposit of just 5%. “The more you borrow in relation to the value of the property purchased, the more important it is to crunch numbers and seek good advice to manage risk.”

Creative clients of Wayne Leggett, at Paramount Financial Services Group, built a granny flat on the property for themselves and transferred the title, without money changing hands, to their daughter, who moved into the main house.

The beauty of the granny flat sitting on the same title is that there are no tax issues, says Leggett. “We also had a retired couple who downsized by swapping their family home with their son’s investment property.”

Fractional funds

Among the options for micro-investing in residential property are fractional property funds such as BrickX and DomaCom. Operating like unit trusts, these funds herald a new era for cash-strapped investors who have either been locked out of the property market or simply prefer to invest in multiple properties in more affordable, diversified and accessible ways.

Fractional property investments take property assets and parcel them into small bits. For example, in the case of BrickX, a property is broken down into 10,000 “bricks” with an initial cost of around $100 each. As soon as property assets have been purchased by BrickX, investors get their share of the rent.

They also receive their share of capital gains once the property is sold or when they on-sell their bricks. On-selling depends on how fluid the secondary market is, so check this out before buying. Interestingly, the average time taken to sell bricks in December was 26 hours.

According to Anthony Millet, chief executive of BrickX, 50% of its investors are under the age of 35, with many using the platform to save for a deposit. As well as the choice and control provided by choosing which properties to invest in, Millet says the ability to exit without selling the whole property resonates with all investors.

Based on fees of 1.75% on entry and 1.75% on exit, Millet says investors have the certainty of knowing the same fee applies for one month or 10 years.

Admittedly, past performance is no proxy on future results. Yet capital growth and rental returns from the Sydney and Melbourne suburbs available on the BrickX website have achieved up to 19% annually. “When compared with our total 3.5% fee, BrickX is a very plausible way to get into Australia’s residential property market,” says Millet.

In the meantime, while rival firm DomaCom has acquired 40 properties on behalf of investors and currently has another 30 book builds there were no secondary market units available at the time of writing.

However, as DomaCom acquires more properties and unitholder numbers grow, it expects units will become available as people look to exit their investment. Assuming there are buyers, DomaCom investors can sell some or all of their units through an online liquidity facility.

To make it easier for investors to dip their toes in its advanced crowdfunding investment platform, DomaCom has dropped its minimum initial investment to $2500. It charges an annual platform fee of 0.88% on the value of the property, with property management fees coming out of gross rental yield.

Instead of participating in one of its bookbuilds, investors can also buy the listed entity responsible for managing the DomaCom Fund (ASX: DCL).

ASX-listed stocks

If crowd-funding investment platforms don’t appeal, another way to micro-invest in the residential property market is through the ASX. There’s no shortage of stocks directly exposed to the residential property market.

Some of these are “pure-play” property stocks with the bulk of their earnings wired directly to development of residential property including AV Jennings (AVJ), Tamawood (TWD) and Devine (DVN).

By comparison, Australian real estate investment trusts (A-REITs) are quite different beasts and include stocks such as Aspen (APZ), Stockland (SGP) and Mirvac (MGR). A-REITs typically make money by buying residential, commercial and/or industrial assets at a discount to their net asset backing (NTA) and selling them at a premium.

While A-REITs display the same characteristics as property, Leggett says they’re also exposed to the underlying risks associated with owning shares.

It’s also possible to invest in a diversified portfolio of A-REITs via ASX-listed exchange traded funds (ETFs). Saving you from having to be a stock picker, ETFs typically capture the performance of an index, including the largest, most liquid of the A-REITs listed on the ASX.

Admittedly, the fortunes of any index can bounce up and down. But in addition to offering cheap underlying exposure to the performance of an index, ETFs also have attractive tax benefits, relative to managed funds, plus distributable income and franking credits. Examples of A-REIT ETFs include VanEck Vectors Australian

A property is broken down into 10,000 ‘bricks’ costing around $100 each

Property ETF (MVA) and SPDR S&P/ASX 200 Listed Property Fund (SLF).

Added benefits of investing in residential property through these sharemarket options are the low cost of buying and the dividend payments many stocks offer, with an average 6% yield being significantly higher than yields from property rental. Then there’s the minimal capital requirement, with investors able to buy a parcel of shares with as little as $500. Also adding to your after-tax position is dividend imputation (franking credits), which is another tax benefit exclusive to investing in shares.

As with property, shares as an asset class are traditionally regarded as long-term investments. However, they provide better liquidity, and you can turn shares back into cash by selling at any time on the ASX.

Another compelling reason for investing in residential property via the sharemarket is the potential for capital growth, combined with the power of compounding returns. While different asset classes perform better at different times, research by Goldman Sachs reveals that shares repeatedly outperform other key asset classes over the long-term.

Contributory secured first mortgages

Taking a diametrically different approach to investing in property via shares are contributory secured first mortgages (CSFM) covering commercial, industrial and residential property.

These investments are designed to provide an attractive yield, without capital growth exposure, relative to term deposits and minimal default risk over one to three years. For example, while term deposits are currently paying under 3% CSFMs will pay between 5.5% and 7.5%.

Chris Morcom, private client adviser at Hewison Private Wealth, says these investments spread investor exposure over different mortgages, with a maximum allocation of $250,000.

He says two key benefits of investing a minimum $20,000 in a contributory mortgage fund provider are, first, income stability, with monthly interest income providing a high degree of cash flow certainty; and, second, capital stability, with each investment (or syndicate fund) secured by a registered first mortgage over real property assets.

However, he says investors must recognise that any inability of the borrower to repay, due to any fall in value, could put some of their capital at risk. “These investments generally aren’t liquid and if they go into default, investors won’t be able to access their money until this is rectified,” he warns. “So suitability could depend on your time frame and need for access to capital.”

Property syndicates

While they lost favour during the GFC, especially after the collapse of Centro Properties and Octaviar, commercial property syndicates and unlisted trusts with predominantly industrial and retail assets are still being managed by the likes of AMP, Charter Hall, Centuria and Australian Unity.

Residential buy-and-hold syndicates remain limited, courtesy of low yields and investor returns. Meanwhile, due in part to fund costs, residential development syndicates are more prevalent, and tend to be two- to four-year projects for apartments or longer for land subdivisions.

For example, the Silk Oak Fund offered by Momentum Wealth successfully raised $6.5 million from investors to acquire three neighbouring lots in two off-market transactions. Currently in the planning process, this 40-apartment development syndicate is predicted to deliver returns of between 50% and 60%.

There are new residential syndicate opportunities like the Silk Oak Fund opening up all the time. However, Momentum Wealth’s Damian Collins says they tend to suit investors with a reasonable amount of wealth as the minimum investment can be anywhere between $50,000 and $100,000.

“Syndicates can give investors exposure to much larger, higher-quality assets delivering better returns at more palatable price points,” he says. “Equally beneficial, syndicators should better understand the impact of all associated fees and management costs.”

While fees charged by syndicator/fund managers vary significantly, Momentum Wealth typically charges a research, acquisition and due diligence fee (about 3%-5% of the site purchase price), a debt sourcing fee (about 1% of the debt raised) and a tendering and project management fee where the property is developed (typically around 3% of the project value).

Collins says expected rates of return quoted by syndicators is after all fees have been paid by the trust.

Risks and complexities

While micro-investing in the property market has its merits, Leggett recommends those saving to buy their own property avoid capital risk by sidestepping growth assets.

But if you’re still keen about micro-investing into property, Nash reminds investors to clearly understand the complexities of each investment vehicle. The product disclosure statement should clearly spell out all the fees and how limited liquidity could delay converting your investment back into cash, he says.

“If you’re planning to invest $15,000 you’ve saved for a future mortgage, ask yourself whether you really want to risk losing some or possibly the lot,” he says. “While a lot of people are trying to find ‘sexy’ ways to invest smaller amounts into property, super funds remain a reliable option with tax benefits as part of a broader strategy.”