Fractional investment in the property sounds as its name indicates; a way to make a profit by buying a fraction of a property belonging to a larger complex or asset.
It all starts with the signing of a trust unit or fund, usually managed by an approved fund manager who is responsible for buying properties and splitting them into multiple units or blocks. An interested investor intervenes, buys one or more of these units and generates a financial return once they are sold.
This is an alternative to pooling assets saved in the same property, which often involves having to take out a large loan with the bank. But how does finally work the investment in building bricks?
Although it does not necessarily generate a high return, it can provide the investor with secondary income and flexibility, without the need for both experience and savings.
Matthew Lewison, director of OpenCorp and industry expert in fractional investment in real estate, discusses how fractional investment fits into real estate growth.
"If the fund buys the property for $ 500,000, the manager will issue 10,000 units – sometimes called financial bricks – at $ 50 a unit. Each unit entitles the owner to 1 / 10,000th of the underlying asset. If the value of the asset increases by, say, $ 10,000, the value of each unit associated with that asset will increase by $ 1, which corresponds to a 2% increase for the investor, "explains Lewison.
However, if an investor wants to understand the gains or losses he has accumulated through the units he bought, he will have to sell his shares on the open market.
Otherwise, they will have to wait until the underlying good, the property in which the investor has invested, is sold; in which the sold price of the entire asset is split and the owner of each unit pockets a share of the cash yield.
But although a large number of investors are involved in this way of investing in real estate, the average investment is very small, notes Lewison.
"For example, BrickX has over 13,000 members after a multi-year operation and currently holds $ 19.7 million in assets. This equates to about 35 properties at the median housing price in Australia. This suggests that the average investment with BrickX is around $ 1,500. "
That said, what is the attraction of fractional real estate investments?
Clearly, you do not need a lot of capital to start. The investor also has the power to choose the properties in which his money is linked.
But Lewison reveals how the options fluctuate: "It depends on the properties available at the time, either as newly acquired assets of the fund with which they have signed, or by the resale of shares of another investor. "
What is the minimum amount needed to start investing?
Getting a first chance as an investor, especially for low-income people, can be difficult. In an economic context where house prices are rising faster than incomes and competition is fierce in the big cities, it can be years before an investor is ready to take the step with confidence. on the market, hoping that his return will be profitable.
It is also hard for beginners to test the water when the economic situation is about to be lost, with everyone taking a close look at the Reserve Bank's next orientation and the price of housing.
In addition, saving for a deposit costs time and sacrifices. Although it is more viable now that lending insurance reduces the amount of mandatory deposits to $ 10,000, or 5% of the value of a property, such an amount may still take months or years to accumulate .
However, fractional investment in real estate may, in some respects, be a shortcut.
"Theoretically, investors looking to engage in fractional investment can start with just $ 50," reveals Lewison.
"Fractional investment platforms offer a range of properties ranging from houses located in regional areas to apartments located in inner suburbs or at the seaside."
With a lower entry barrier – a single paycheck slitch – fractional real estate investments remove some of the pressure to buy and open the pool of participation to a wider range of demographics and types of income.
The Benefits of Fractional Real Estate Investment
The small amount needed to start means that the time it takes for a beginner or low income investor to start capitalizing on residential real estate is greatly reduced.
"Investors can also save time because much of their work is dedicated to securing and managing properties," Lewison said.
For investment beginners, high-risk investment decisions can be a little less stressful, even if it is expected that even beginners will seek the advice of a qualified financial professional for help make the right decisions.
This relief stems from the fact that investors are able to divide their limited capital into more properties, rather than having all their money tied to the same property, Lewison explains.
"Self-directed retirement funds can invest without the need for a huge payoff or be fully exposed to a single asset," he says.
Fractional investments in real estate also remove the investor from the role of property manager or owner, as they do not need to be physically available on the building, nor to ensure that it is available. day at the time of sale.
However, offering a small investment in a brick or a unit will not necessarily result in a high return, and certainly not enough to make a deposit for the next move of an investor. But it will mean a more controlled, incremental return that can accumulate over the long term.
And this sense of control, in what can often be an unpredictable playground, is considered valuable to any investor – especially those who are vigilant in the market for the first time, juggling with household finances or not doing it. able to save for a big deposit.
A newcomer can dive into the water and see how the investments and the manager behave, explains Lewison.
"If the performance is positive, then you can increase your investment. Most of these platforms offer regular savings plans and reinvestment plans in the distribution, which allows you to add to your balance a monthly basis similar to a bank savings account. . "
What are the ins and outs of "liquid investments"?
Since the fractional investment of assets operates through a functional secondary market, it is a "liquid investment". but what does that mean? And why is it important to understand how such a platform works?
According to Lewison, at this stage it is impossible to accurately measure the true magnitude of the fractional real estate investment market, primarily because it is not as transparent as a open market, such as ASX.
This means that he becomes more vulnerable to manipulation on the part of the fund manager or an independent third party.
"Secondary markets are hosted and controlled by the fund manager. They do not share the auction volume, to buy, as opposed to bids, to sell, "says Lewison.
"The fund manager has every interest in demonstrating that there is a secondary market because it is one of the main selling features of its offering. As such, there is great potential for the manager to arrange related parties to redeem the offered units to provide the appearance of a functional secondary market. "
Lewison thinks that only when the split investment market is over $ 100 million will such casting cases be a thing of the past.
"If [the market] is artificially blocked, then [investors] may end up in an illiquid investment once the artificial demand has been withdrawn," he says.
Constitution of a portfolio of real estate investment fractions
Rather than becoming a full owner of a house or even signing up to 50% of its gains and losses through a real estate joint venture, an investor can spread the same amount of their cash invested on several properties.
For example, their assets can be spread over 20 properties, which means that the investor acquires a 5% stake in each of them.
Lewison highlights what can happen if units or bricks suffer losses: it is more likely that the profits of the remaining properties or bricks will offset those losses and, overall, a profit will be maintained regardless of whether it There were some bricks that flaked off.
However, if this security coverage extends, the fractional investment in real estate may be limited in some respects.
Most small real estate investors will be far from the experts, says Lewison, and although a portfolio can be leveraged effectively, "letting novices choose their own properties to build a high-performing portfolio will probably not give the best results. ".
"And as each investor portfolio is different, fractional investment platforms will never be able to publish their performance results. In other words, they are designed for the "user experience" of investors and not for a successful long-term investment outcome, "he said.
While an investor will most likely have to borrow money from a lender to finance and control a home through the power of his cash deposit, this varies depending on the size of the property. 39 fractional real estate investment.
"In the case of fractional real estate investments, banks have no recourse against the owners of the underlying property. In addition, each property of the trust having a separate property right, it can not be used to indirectly guarantee a mortgage. As a result, the rate of investment reduction in real estate investments is often 0%, "says Lewison.
When an investor buys a single property as part of a 20% deposit and a bank loan, he can benefit from 100% of the capital growth and income that the Property generates after fees and interest. If the value of the property increases by 20%, they have effectively doubled their initial capital.
On the other hand, if the deposit was invested in several fractional real estate investments, Lewison stated, "They would own only 5% of the 4 individual properties, which would entitle them to 5% of the capital growth. and income from properties after expenses, but do not give them any control over the decisions made regarding that asset. "
If the value of the property increases by 20%, the investor would benefit from a 20% increase in own funds, says Lewison.
"You potentially negotiate higher returns, which you could get by buying a property directly on your behalf, getting quick access to the market and facilitating diversification."
Tips for the first time
Mr. Lewison advises those who are new to investing and interested in operating small investment properties: "Do not be fooled by sophisticated packaging."
"At the end of the day, investors should systematically look for an investment that achieves their medium- and long-term financial goals while balancing the risks to which they are prepared to expose themselves". he declared.
The director also emphasizes the double-edged nature of diversification. If it can prove to be a great way to minimize risk, to jump into a varied range of multiple properties, it could also mean that money will be spread over many bad investments if this is done. without diligent reflection or reason.
With this in mind, it is important for investors to make informed decisions, regardless of the amount of their investments. A game plan can be best used with the advice and guidance of a qualified financial professional, who knows both the benefits and the risks associated with fractional investments in real estate.
Know your risks
As with all other areas of real estate investing, the possibility that the value of the property falls may pose a risk. And if that happens, any units or bricks bought by an investor will also generate a loss.
This can happen in different ways.
"It may be difficult to find tenants and the property may not receive the expected rental income," says Lewison.
"The secondary market for the sale of units may decline and investors may remain locked into their investment without being able to exit until the manager or trustee decides to sell the asset."
Managed funds are also subject to strict compliance laws, says Lewison. Thus, if the manager or trustee does not have the impression that his business model may be up to the regulatory standards in effect, he may decide to close the business.
"This would create uncertainty for investors who would later own a property with a dozen other independent investors," says Lewison.
In addition, it is important to note that properties will only be sold after a holding period that can last from 5 to 7 years.
"If you are stuck in underperforming assets, you may need to keep them for five years without being able to sell them because all unit holders are limited to a minority interest in each building. for stamp duty and property tax purposes, "says Lewison.
"Therefore, your actual liquidity is 100% dependent on the secondary market for the resale of financial bricks."
What are the chances of a substantial return?
For those who aspire to "get rich fast," Lewison does not think that fractional investment in real estate will seem too exciting.
First, income can be minimal. The investor primarily relies on market capital growth, which means that if the market rallies 10%, a unit or brick would also increase by about 10%.
Investors could choose to actively trade their bricks, buy and sell regularly in the hope of making a quick profit. But with the transaction costs for most trades, Lewison says it could also be a very fast way to erode capital.
As in the case of ordinary real estate investments, he believes that the strategy of purchase and preservation is always meaningful.
"There is something to be said about a strategy that does not claim to enrich you beyond your wildest dreams overnight," Lewison said.
"As a reminder, the Australian real estate market has been the best-performing asset class over the last 30 years, with only 4 short periods of negative growth.
"If an investor could have contributed $ 100 per week to an Australian real estate market portfolio, starting in 1988, with no deleveraging, assuming that the portfolio is at least equal to the 3% average rental yield and growth annual capital of 8.7%. In the Australian market as a whole, this investor would now have net assets of $ 1.2 million for a total contribution of $ 166,400 only. "
This is not a bad profit, since the investor would not have incurred debt to obtain such a result. But we must not forget that the future is not clear. the returns and risks faced by investors starting out in fractional real estate investment today can produce different results.
"The sector is still relatively new. Different players, such as BrickX and Domacom, are leading the way, but may still be finding their bearings. Their offerings will most likely continue to evolve to offer more choice to investors and encourage more participants to enter the market, "Lewison said.
"With an Australian real estate market valued at more than $ 5 trillion, nearly three times the size of the ASX, fractional investment platforms are the first wave of market disruption. Australian residential real estate investment. "
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