Build a deposit brick by brick

First-time buyers can invest their savings in the asset class they plan to acquire

Getting together a deposit to buy a home, especially in expensive city markets, is a major barrier to many of those wanting to become homeowners in the cities where they work. You need at least 10% of the price – and preferably 20% – plus all the buying costs.

For example, in Sydney, our most expensive city, you need a deposit of between $86,000 and $172,000 for a median-priced dwelling, which was $855,287 at the end of August, according to CoreLogic. You also need stamp duty of $34,000 for your first home, and money to cover conveyancing, inspections and other odds and ends.

Even in our cheapest capital, Hobart, a deposit of between $43,730 and $87,460 is needed for a median-priced dwelling, which was $437,254 at the end of August. You will also need $15,600 for the stamp duty plus funds to cover other costs.

First home buyers are the target market for the recently launched Smart Invest product from fractional home investing platform BrickX. “Potential first home buyers will be able to save their deposit in the asset class they are trying to get into,” says Anthony Millet, CEO of BrickX.

Smart Invest sits alongside BrickX’s established product where investors choose which properties on the platform to invest in, decide how many bricks to buy (each property is divided into 10,000 bricks) and when to sell them.

The new option allows users to set a monthly deposit amount that will be invested in their BrickX account, with the properties chosen by a team of analysts and specialists. The portfolio for this option won’t necessarily include all the properties on the platform. As always, the focus will be on outperforming returns from the Australian property market, says Millet.

There are now 18 properties on the platform: 11 are in Sydney, three in Melbourne and two each in Adelaide and Ballarat. Net rental yields are typically low, ranging from 1.04% to 2.72%pa, meaning investors are depending on capital growth to earn decent returns.

So how much of a worry is the predominance of Sydney properties given that house prices in Sydney have fallen 5.6% in the year to August, according to CoreLogic?

“All our properties are high quality and in growth areas”, says Millet, pointing to the 2.6% increase in value of the Sydney portfolio in the six months to June 30. This outperformed overall Sydney prices, which fell by 2.6% over the same period. But since then Sydney prices have fallen further so all eyes will be on the December valuations to see if the BrickX portfolio can continue to outperform.

The three Melbourne properties returned an increase in value of 0.26% in the six months to June compared with a fall of 1.8% in values for the overall Melbourne market. This means six-monthly returns from these properties ranged from 0.97% to 1.45% (applying 0.26% growth to each property), no better than you could earn from parking your money in very safe term deposits or online bank accounts. An Adelaide property increased in value by 6.05% in the period, compared with 0.4% growth in the overall market. The second Adelaide property was bought in August this year.

Significantly, the latest three properties added to the portfolio have been in Adelaide and Ballarat. “We are concentrating on areas that are going through growth phases and identifying micro markets that will outperform,” says Millet. “We’re now starting to look seriously at the Perth market.” Millet says investors should focus on long-term returns. Residential property (9.1%pa¹ over the 20 years to June 2018) outperformed shares (8.6%pa²) and cash (4.14pa³) over the same period. “If someone invests $500 a month with the Smart Invest option they will save a deposit of $100,000 in 10 years and one month (assuming the same long-term performance). If they saved the same amount in cash, it would take 12 years and seven months. The property option is 21% quicker.”

The minimum investment for the new option is $250. Both BrickX products have exactly the same fees, 1.75% for each brick bought and sold. All costs relating to each property are deducted from gross rental income, the property management fee is 6% plus GST and annual audit and valuation fee is 9¢ per brick a year.

(¹Based on CoreLogic home value index with 3% net rental yield assumed with returns reinvested. ²Based on S&P/ASX 200 Total Return Index, with dividends reinvested.

³Based on Reserve Bank cash rate, with interest reinvested.)

Pam Walkley, founding editor of Money and former property editor with The Australian Financial Review, has hands-on experience of buying, building, renovating, subdividing and selling property.