Fractional property investment offers an alternative to the huge up-front costs of traditional property investment.
Property is an attractive asset class for investors. It has performed well historically, offers a tangible asset and the returns have the potential to be substantial. But as house prices continue to rise, the ability to invest in property moves further out of the reach of average Australians. Fractional investment platforms could offer a solution for those looking to get a foot on the property ladder without the massive initial investment.
With fractional property investment, the cost of a property is divided into shares. These shares are then sold to investors. Investors receive income from rent charged on the property and can also get capital returns on the property when it is sold or they sell their shares. The cost of the shares will rise or fall proportionate to the change in the value of the property.
Fractional property investment may sound similar to some other forms of pooled property investments, such as a real estate investment trust (REIT) or a property syndicate, but fractional investment differs in a few key ways.
First, unlike an REIT, fractional investment allows an investor to hand-pick the property they’d like to invest in. This allows an investor to build a portfolio of individual properties, rather than buying into a group of pre-selected properties.
Second, unlike a property syndicate, fractional property investment offers liquidity. This means investors can cash out their investment at any time by selling their shares. Whereas property syndicates only see capital gains on the sale of their property, fractional property investors can sell their shares any time they want to access their capital gains.
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Fractional investment has a number of advantages over traditional property investment. One major advantage is that the barriers to entry are much lower. By splitting the cost of a property into shares, investors can gain exposure to residential property for a small initial outlay.
Also, fractional property investment is a liquid investment. This means the investor’s funds aren’t tied up for a specific amount of time. Fractional property investors can sell their shares whenever they want and receive a return proportionate to the increase in value of the property.
Finally, fractional property investment allows investors to diversify their funds across a wide portfolio of properties. While it might be challenging, or even downright impossible, for the average person to buy a large portfolio of residential properties, fractional investment allows investors to buy shares across a wide range of properties for a relatively small initial investment.
The primary drawback of fractional property investment is that the eventual returns are not as significant as the returns in traditional property investment since the initial investment in fractional property investments is so much smaller.
Another potential drawback is that investors own shares of property rather than a tangible asset. A traditional property investor has the option to become an owner-occupier in their property should the need arise. This option isn’t available for fractional investors.
How can I get started?
Fractional property investment is a relatively new concept in Australia, and as such there are a limited number of platforms available. The two main fractional investment platforms in Australia are BRICKX and DomaCom.
BRICKX uses a buyer’s agent and property market experts to find properties with positive rental returns and the potential for strong capital growth. It then purchases these 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.
DomaCom pools investor funds to purchase properties. The platform allows users to commit funds along with other like-minded 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.