If you’re frustrated by the high property prices in Australia’s capital cities, especially Sydney and Melbourne, then you’re not alone. You just can’t see a way that you will be able to afford to invest in a property, let alone, buy your own home. But there may be a solution.
For many first time prospective property investors it is becoming far too difficult to get enough money together for a deposit for their first investment, as property prices have sky rocketed in recent years.
Thankfully, for these people and many others, fractional property investing entered the Aussie market back in 2016 with the emergence of two start-ups, BrickX and DomaCom and more companies are now also entering the market.
Fractional Property Investing Explained
Quite simply, fractional property investing is the process of investing in a share of a property and then also sharing in the rental income and the increased property value when the property is eventually sold.
It’s very similar to buying shares in a publicly listed company. In fractional property investing you’re purchasing a share of the property and the entry costs are comparatively low.
So, if you have some money to invest but you’re finding it hard to accumulate enough for a 20% deposit on a home loan, then fractional property investing could be right for you.
What Are The Benefits Of Fractional Property Investing?
The major benefit of this type of investment is that the entry levels are really low. In fact, you can buy just one share of a property for as little as $50. Here are some other benefits:
- You earn an income from the rental returns of the property which is much higher than what you would earn by just leaving your money in the bank. Bank interest rates range from around 1-2 per cent while rental returns from property shares range from 5-15 percent.
- Your investment return can help you save enough deposit to get into your own home eventually.
- With fractional property investing you own part of a property and share in the benefits without having all the additional responsibilities of being a landlord yourself.
- With some platforms, like CoVESTA’s invest and rent model, you can even purchase enough shares to allow you live in the property as a tenant and pay less than market value rent. Then the remaining shares of the property are sold to other investors while the property is retained for a minimum of 5 years.
This gives you the security of having a long term rental as well as a share in the capital growth of the property. At the end of the five year period you will have first option to purchase the property outright as long as 75% of the investors agree to sell.
- Unlike property investment syndicates, you are able to sell your shares on the various platforms before the property is sold, if you need to.
Here’s A Brief Snapshot Of The Different Fractional Investing Platforms
Currently there are 3 main platforms offering fractional property investing in the Australian marketplace. Let’s look at what each one offers.
BrickX was one of the pioneers in Australia offering this type of investment opportunity. Currently they offer properties in Melbourne, Sydney and Adelaide which they split into 10,000 units referred to as ‘bricks’. Individual brick prices range from $60 to $157 and net rental returns range from 1.2 to 2.8 per cent.
Getting started with BrickX is relatively simple as it’s an online platform. All you need to do is sign up for a free account, choose the property you want to invest in, purchase the amount of bricks that you can afford and then sit back and benefit from the rental income of that property.
BrickX also gives you updated data on each property including investment yields, independent brick valuations, cashflow forecasts and estimated return on investment.
Another pioneer in the fractional property investing marketplace is DomaCom. They have a slightly different system where you select a property that you are interested in from their portfolio and when enough investors have indicated their interest, the property is purchased and you buy your nominated shares.
Their systems follow the increasingly popular crowd funding strategy. Their properties are carefully selected for maximum rental yields ranging from 5% to around 20% and include both residential and commercial properties.
To get started you need to deposit the amount you want to invest (minimum $2500) into their interest bearing Cash Pool account. You then choose the property or properties you want to invest in. Once the crowdfunding campaign process is completed, the property will be purchased and you will start receiving your share of the rental returns.
CoVESTA has a slightly different model again. With this platform you can start a syndicate to purchase a property and then become a tenant for as little as 5 percent of the purchase price of the property. The property is held for 5 years and if 75% of the investors decide to sell it, you have the first option of buying it.
This platform also allows you to just invest in various properties around the country by purchasing ‘blocks’. Each property is divided into 100 blocks, therefore each block costs just 1% of the property’s purchase price. This means you can easily purchase 1 share of a property of your choice for under $4000 and become a CoVESTOR.
With CoVESTA, property owners also have the opportunity to sell a portion of their current property while still retaining the right to stay living in the home. This gives home owners a way to cash in some of their home equity.
As you can see from the above examples, there’s now more than one way that you can enter the property market without having a lot of upfront capital to start with. Bear in mind though, that there are, of course, fees and charges which come with this type of property investment.
Before you consider fractional property investing you should consult your financial adviser to see whether this type of investment is right for you. It certainly appears to be a very affordable way to start your property investing journey.