Using fractional property ownership to crack the property market
One of the more affordable options to invest in a property is by putting money in real estate investment trusts or REITs. Now, with the appearance of fractional property investment platforms, people now have another method to get into property ownership.
What is fractional property investing
Fractional property investments have opened up a way for people to invest in real estate and benefit from its long-term profitability. It’s also known as property crowdfunding, due to the nature of how investors take part in the viability of the business venture.
Fractional property investments are different from property syndication in the way they can get their ROIs. Fractional property platforms allow investors to buy and sell their units similar to how shares are traded on a stock exchange. On the other hand, property syndicates have to wait for the property to be sold before they realize their profits.
Fractional property investors are free to build their own portfolio by selecting which property to invest into. You’ll also be able to choose the level of ownership you want to have in each property by identifying how many units of that property you want to purchase.
The best part about fractional property investment is how some of them allow you to actually be the tenant of the property you’re investing in. It’s like crowdfunding the property you want to buy to help you minimize the costs and save enough to eventually own the property in the future.
Investments in fractional properties are also taxed by the ATO. Many SMSF holders are interested in diversifying their portfolio by getting into this investment vehicle. They have to take note, though, the rules associated with investing in fractional properties.
Fractional investment platforms
The affordability of this investment method resulted in the appearance of a number of online platforms that help people get invested in properties. These platforms allow every citizen to take part in real estate investing and also give them a chance to eventually purchase their own homes.
This pioneer in offering fractional property investment to people started in 2016. The platform now currently has around 10,000 members with a total of $17 million invested across 14 different properties. Majority of the investors here are people under 35 years of age.
Brickx works by dividing a property into 10,000 ‘bricks’ – something similar to a company share. You can then choose how many bricks to buy on their platform. You can profit from the rental income of the property with an amount corresponding to the number of bricks you hold. Any changes in property pricing are reflected in the value of each brick when you sell them on the platform.
The price of each brick ranges from $50 to $160, depending on the overall value of the property involved. Net profit from renting these properties amount to 5% to 15% which is more than the 1.2% to 2.8% per annum offered by banks.
Brickx charges 1.75% for every transaction, that is, the sale or purchase of bricks. This doesn’t include the management and administration fees you have to pay them monthly.
The DomaCom platform allows investors to select the property they want to invest in. The goal is to pool enough funds from investors to purchase properties. Once the target funding has been reached, investors are given units proportional to the amount they invested. Investor funds are handled under a Managed Investment Scheme (MIS).
DomaCom offers properties in the commercial, residential, industrial, and leisure sectors.
The minimum investment is around $2,500 and the company charges a 0.88% annual fee on invested funds.
CoVESTA is popular among Australians due to their option of allowing investors to become the tenant of the property you’re investing in. This makes it easier for investor-occupiers to pay for a home they want to live in in the future.
For example, you’re looking at a home valued at $1 million. You decided to buy half of the units for that property which amounts to half a million dollars. You then invited your parents to buy 25% of the remaining units and the other 25% by other investors within the platform. You can decide to become the tenant of the property, pay rent, and save enough money to buy out the investors after 5 years of living in it.
CoVESTA charges $0.55 for registering on their platform and a 2.5% purchase fee for buying a property that costs more than $5 million. These fees don’t include the management and admin charges yet.
Owning a home is the Australian Dream, but with the current prices and rate increases in the property sector, this vision seems to have become harder to achieve for many people. It shouldn’t be impossible to reach this target, though, especially with the help of REITs and fractional investment methods.
Fractional property ownership is just like any other investment asset. You can diversify your allocation to minimize risks and maximize profits by investing in assets situated in prime locations. Money put into this kind of investment scheme should be handled the same way you handle your stock portfolio, complete with risk management and assessment procedures.