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Buying Part of a Property – The Rise of Fractional Property Investment - YouTube
Channel: Daily Insight
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Obviously, the cost of housing in Australia
has become a barrier for many young people
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who are seeking to buy their first home (that
is, to get their metaphorical foot on the
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property ladder, so to speak). Australia’s
obsession with property permeates throughout
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society. Recent research shows that Australians
spend an average of 2½ hours a week preoccupied
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with the property market. That’s more than
double the amount of time they spend at the
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gym, and almost three times as long as they
spend talking with their parents. Property
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is king.
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Consequently, in the last few years, fractional
property investment has become a thing. That
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is, property market hopefuls can now buy a
share of a single property at a fraction of
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the price. For example, BrickX allows you
to buy so-called “bricks” which are equivalent
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to 1/10,000th of the value of the property
(so $50 for a $500,000 home). At first glance,
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this sounds great being able to buy into a
property for only $36 or whatever, but is
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there a catch? Is this really helping people
get closer to their property dream?
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Well, services such as BrickX, DomaCom, CoVESTA,
and most recently, Lakeba with their “bricklets”,
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are billed as allowing individuals to get
into the property market without the large
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upfront expense and the hassles of dealing
with ongoing expenses. But obviously, these
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companies aren’t working for free. They’re
taking their own cut somewhere along the line.
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BrickX, for example, has a flat 0.5% fee on
all brick transactions. That is, when you
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buy or sell a brick, they take a small percentage.
As an example, if you purchase 50 bricks at
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$100 each (a total of $5,000), you’ll end
up paying $5,025. Each property also has its
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own monthly expenses which are taken out of
the gross rental income before divvying it
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up and distributing it to the brick-holders.
Basically, you get a percentage return. 1.28%
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in the case of this property.
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So why do it? Why would somebody want such
low returns? Depending on how old you are
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and how much money you are willing to invest,
even an online bank account can get a better
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return with a rate of between 2 and 2.5%.
So why do it? Why buy bricks? The answer — Capital
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Gains.
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The owners of these properties are banking
on their investments increasing in value.
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BrickX makes it very clear on their website
that there are two ways to make money — Monthly
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Rental Distributions, and Capital Returns,
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“As property prices change so does the value
of your Bricks. Every 6 months properties
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are revalued so you can keep track of performance.
Realise any capital returns by selling Bricks.”
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This is the figure that they want you to see,
“20yr Historical Suburb Growth”. They’re
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hoping that you’re hoping that the property
market is sure to rise so that you invest
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your precious dollars in a fragile market.
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But of course, they’re not out to cheat
you. Legally, they have to tell you of the
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potential risks. If you scroll right down
and take a look in the page footer — a place
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where they know most people won’t look — they
state a couple of mandatory truths: “Past
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performance is no indication of future performance”;
“Any forecasts are subject to change without
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notice”; and the big one, “Income and
capital returns are not guaranteed”. Yes,
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you’re risking your money by getting involved
in fractional property investment. To be fair,
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that’s true for any investment.
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But the big question, “Would I do it?”.
Is buying a small portion of a property worth
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it? Will it get you closer to owning your
own home? The simple answer to all of these
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questions as you’ve probably already guessed
by now — No!
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If you’re looking for somewhere to park
a little bit of your extra cash, and you’re
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banking on property prices increasing, then
sure, go for it! But if you want to save up
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for your own home, then this is wasting your
time. I’ll tell you why. Even if house prices
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do increase and your “bricks”, or “bricklets”,
or whatever rise in value, the cost of buying
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a house also goes up at the same rate. You’re
actually never getting any closer to owning
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your own home.
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I’m not trying to pick on BrickX. They’ve
seen a market that they can exploit and are
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trying to profit from it. Good luck to them!
But in general, in my humble opinion, fractional
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property investment is not a good way to get
you closer to home ownership. You’d be better
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off investing in some quality ETFs, or even
putting your money in a high-interest online
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bank account such as UBank.
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Become a fractional property investor if you
want to. But that doesn’t make you a property
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owner.
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