Doing the ’fractional’ sums

We run the rule over a cheap new way to enter the property market

DIVERSIFICATION has been one of the fundamental foundations of good investing. That’s having a good spread of investments so that a couple of “duds” can be offset by better performance from the majority.

Many small investors have achieved this diversification through options like managed funds, listed real estate investment trusts, property syndicates and ETFs; where smaller investors pool their funds and professional investment experts manage a portfolio of shares or property.

These types of options have been around for decades and are a terrific way for average investors to get the benefit of diversification and expert management . . . for a fee.

More recently, there has been a spate of new “fractional investment” opportunities being offered, targeting the property industry. The rationale behind them can be pretty compelling . . . a low-cost entry on to the property merrygo-round.

In essence, ownership of an individual property is sliced up into a multitude of investment units . . . which can range from 100 shares up to as high as 10,000.

So a $500,000 home unit, for example, can become a fractional investment opportunity where each fraction available for investment could be worth $5000 or $50 each.

Young adults, and their parents, are constantly concerned at the high cost of housing (particularly in Sydney and Melbourne) and are keen for any solution that helps them start the journey to the great Australian dream.

So the idea of buying $100 fractional units in a good residential property is seen as a great first step on the property ladder. The high cost of buying into property all of a sudden becomes easy.

But, like every investment, the pros and cons have to be weighed up and careful consideration given as to whether it’s right for you.

Firstly, there are a couple major differences between these fractional investments and real estate investment trusts or property syndicates.

Unlike a real estate investment trust, where fund managers choose the properties in the portfolio, fractional investing allows the investor to build their own portfolio of individual properties and the level of ownership they have in each.

Unlike property syndicates, where investors have to wait for any capital return until the sale of the property (or properties), some fractional investment platforms allow investors to sell at any time – like selling shares.

Unlike other managed funds, some fractional investments allow you to buy into a property and actually become the tenant. The goal is to get other investors to help fund your purchase and to buy their equity out in the future.

Just like a managed fund, the success of a fractional investing opportunity comes down to the fees you have to pay and the investment potential and returns from the property chosen. Illustration: JOHN TIEDEMANN

So picking the right property (or properties) in the right area is still a key ingredient, whether it’s buying a fraction or a whole property.

As for fees, it depends on the fractional platform being used.

purchases properties and divides the cost into 10,000 shares, or “Bricks”.

BRICKX;

Investors can buy and sell Bricks on the platform and receive monthly rent payments proportional to the size of their investment. BRICKX charges a 1.75 per cent transaction fee to buy and sell bricks online.

pools investor funds to purchase properties. The platform allows users to

DomaCom

commit funds (minimum $2500) along with other likeminded investors toward a property for sale.

Once enough investors have committed, the property is purchased and operates as a Managed Investment Scheme (MIS). DomaCom also offers a platform that allows investors to sell their shares to other investors. It charges an annual management fee of 0.88 per cent invested in a sub-fund.

divides properties into 100 units (or blocks) and is like a private property syndicate that allows investors the option of being an equity owner and tenant of a property.

It charges a registration fee of 55c, plus a Block purchase fee of 2.5 per cent of the property price and an annual syndicate management fee of $75 per Block.

With all platforms, ongoing costs of each property (council fees, insurance, maintenance etc) are paid for out of the rental returns from tenants.

BrickX and DomaCom allow investors to have a fraction in a range of different properties in a range of different locations.

CoVesta not only allows investors to do the same, but also allows individuals to target a property they want to live in.

For example, a young couple may find a home unit for $500,000 and be able to pay $250,000 for half the 100 units in the property. Of the remaining 50 units at $5000 each, their parents may buy 25 and the other 25 units are offered to outside investors from the CoVesta platform.

The young couple becomes the tenant of the property and, say, at the end of five years, gets the home revalued and pays the other investors out.

It’s quite an interesting way for young Australians to get into their first home, the parents are protected, and other investors help out with the prospect of a good return.

While fractional investing is new, it needs to be carefully considered and treated with the same caution as any other investment.

CoVESTA