As property prices continue to be unaffordable in some Australian markets, fractional investment has emerged to offer investors a cheaper way to buy property, without the huge deposit and purchase costs.
Fractional property investment is a relatively new concept which combines the idea of crowdfunding with property syndication and the share market. It allows investors to own a share of property, rather than having to purchase the entire property outright.
How Fractional Property Investment Works
A range of properties are purchased by a company and put into a trust, which is then split into shares and sold online for as little as $50 per share. The company’s online platform allows you to buy shares for the property you’re interested in and just like the share market, the share value changes in line with the property value. As an investor, you earn income from rent (in proportion to the size of your investment) and you can sell your shares anytime to access capital gains.
The Benefits of Fractional Property Investment
Buying shares in property can help you to raise a deposit. It also offers first home-buyers a way to get into the property market sooner and learn how property markets and cycles work.
Unlike property syndicates, fractional investing allows the investor to choose the property and build a portfolio of individual properties for diversification. It also offers liquidity, because shares can be sold at any time. Property syndicates, on the other hand, only distribute capital gains to investors upon sale of the property.
There are currently no listed REITs for residential property in Australia, so fractional investment companies have provided a way for investors to purchase residential property, rather than commercial and retail properties. Most people are more comfortable with the lower risk of residential property investment.
The Disadvantages to Fractional Property Investment
Fractional property investment may provide a way for investors to avoid purchase costs like title transfer, stamp duty and rates, however there are still some fees to pay. There are management fees, which are allocated according to your investment, and transaction fees which range from 1-2%.
Property markets move in cycles which affect the property value. Investors would need to be in a position to hold onto their shares for 7-10 years to ride out property downturns. Investments held over a short period of time when the market is slowing down, will fail to provide any capital gains.
The small initial investment means it could take years to receive decent returns after your share of maintenance expenses and management fees are deducted.
The advantages of fractional property investment far outweigh the disadvantages, but it is important to do your due diligence before purchasing any property or property share. Fractional property investment is still a new concept with unproven results. If you need advice, contact our team of investment professionals now and we can help you decide if fractional property investing is right for your financial situation, call: 1300 522 562 or email: team@jrprosperity.com.au.
