Farctional Investing

It may be a fraction of the cost but is it worth it?

The prospect of becoming a property investor for less than $200 sounds like a very attractive proposition, particularly to young Australians.

Seemingly priced out of the market, fractional investment can potentially give new hope to those looking to get their start in the market.

Fractional investing, much like its name suggests, means investing in a smaller piece of a whole asset. The property is divided up into small shares and sold off to investors at a price that is affordable compared to the whole property.

These investors will then receive income via rent from the property and can also benefit from capital gains once it sells or they sell their shares.

It is important to note though that all gains and returns will be proportional to the size of the share in the investment.

Who can I fractionally invest with?

Currently in Australia there are three main fractional property investment companies that investors can utilise.

DomaCom is a company that uses internet technology and market concepts based on the splitting of equity. 

It operates in such a way that investors can invest similar to companies that are publicly listed on the stock exchange.

Investors will select and then crowd fund for a property that will be purchased when the target is raised. Investors can commit as much towards the investment as they like. Once purchased it is divided up into units that are proportionate to the investment amount made by the property investor.

BrickX uses a buyer’s agent and experts in the property market to locate properties with good potential returns for their prospective investors. It then purchases these properties and splits the total cost into 10,000 shares. Known as “Bricks”, investors can buy and sell their bricks on the platform and receive their return on investment via monthly rent payments and potential capital gains.

Currently, there are bricks available for as little as $33 on a property in Ballarat North.

CoVesta gives investors multiple options for investment.

The Invest and Rent option allows for the opportunity to invest in and co-own a property. When an investor leads this type of syndicate with CoVesta, the property will be held in a trust for five years. 

In this time period shares can be traded to other investors or retained. In the fifth year, 75 per cent of investors vote to either keep the investment or sell it.

This is seemingly the least flexible of the fractional investment options available to Australians currently due to the set time limits that a property must be retained.

There is also the option of being a passive investor. With this, CoVesta will make your investment decisions for you and is a good opportunity for those that don’t like to micromanage their investments.

Finally, there is also an option to build a diversified portfolio of properties; from apartments to houses and from all across Australia.

Fraction Dice Pic

Positives

There are a number of positives that come with a fractional approach to property investment.

Fractional investing comes with some positives that would be very appealing to prospective investors that have been priced out of the market. Thanks to much lower sums needed to invest, through dividing the cost of an investment property into shares, a stake is easier to acquire.

A property portfolio that uses this fractional buying method can also allow for an investor to have a diverse amount of investments across multiple properties. 

Whereas in the current housing environment being able to buy a property has become very challenging, fractional investment allows investors to buy shares across a wide range of properties for a small sum when compared to the full cost of the property.

Another advantage of fractional property investment is its liquidity. This means the investor’s funds won’t be tied up for a specific time period. With most fractional property investment, shares can be sold at any time with the seller receiving a return that is equal to the change in value the property has experienced.

Negatives

When considering fractional investment in property, the seemingly big flaw is the smaller returns it offers when compared to usual property investment. 

Property is traditionally considered to be a slow burn investment strategy. While considered less volatile than other investments like shares, the returns you receive will be accumulative over the long-term and not the short-term. 

Due to investing a relatively small amount, the returns you get may not be as fruitful from the immediate returns received from rental income. The returns you do receive will also be an amount that has had your share of expenses and maintenance subtracted.

Property also relies on capital gains for a return on investment which is tied to the fractional amount of your investment.  These companies will generally charge a fee on the buying and selling of the shares of property too.

Is it right for you?

Due to its non-volatile nature, property is seen as something of a safe investment class for investors. In this economy though, it is an asset that has become a very hard to secure.

In this sense, fractional investment has made it easier to gain access to the property market for prospective investors.

As with any investment though, whether fractional investment is right for you should depend on the return on investment that you can secure. On rental income alone, it can take decades to earn back the money that you have invested.

This may also be a difficult scenario to take for investors as fractional investing does not have the tangible reward that traditional property investing has.

With all major investments, it is important to consider your own financial situation when considering if fractional investment is a strategy that can be successful for you.

Have you had a success story through fractional investment in property? Or has your fractional investment left you with a fraction of disappointment?

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