Do­ing the ’frac­tional’ sums

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

The Western Star - - MONEY SAVER -

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.

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.

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

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

Il­lus­tra­tion: JOHN TIEDEMANN

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