What is ‘fractional investing’? Property investment terms explained
Fractional investing means a little bit like how it sounds. It’s to do with investing in a portion, or a fraction, of an asset. In shares, this may be investing in less than one share. In property, it’s paying for less than one property.
Fractional investing has previously been seen as popular for luxury assets, such as yachts, planes and similar across the globe.
Despite this, it’s a relatively new concept for Australian standard residential property, even while it has played out overseas. This means that you will want to get strictly independent advice, as well as checking with your accountant and lawyer beforehand to ensure that it stacks up. You’ll also need to learn the ins and outs before heading in as it does differ substantially from traditional property investing.
DomaCom, who is heavily pushing a fractional investing model, sums it up as considering it like a crowd funding or syndication type structure, where you can invest a small amount to get into property investing.
How does this differ from a Joint Venture?
Where a joint venture is usually entered into by people that know each other well, and are jointly responsibly for the property, fractional investing allows an asset to be owned by a number of individuals that may not even know one another.
A level of independence is retained by each person who owns a fraction of the property. You will also be issued with ownership of ‘units’ rather than the Title.
How does it differ to a property syndicate?
You’d be right in thinking it’s similar to a property syndicate – indeed, the concept behind it appears to be identical. However, it offers a benefit over and above syndication.
“Syndicates are costly to set up, once you are in the syndicate you are there for the duration and there’s no liquidity for the structure. What we set about doing was introducing equity market concepts into the product,” DomaCom general manager of sales and marketing Warren Gibson told Property Observer earlier this year.
It’s about putting multiple stakes in multiple properties – much like many share market investors.
Diversifying and (potential, although not guaranteed) liquidity are two benefits promoted, however the liquidity relies upon the re-sale market, something that perhaps isn't as bustling now as it has the potential to be in the future. Obviously, entering into the market when you have a lower balance of funds to play with is another substantial benefit, however you do lose some of the benefits of straight forward property investing.
Namely – total control over the asset. As you are not the sole owner, and many other investors have a stake, your decisions around renovating, redeveloping a site or allowing specific tenants are going to be managed for you. This may not always be to your liking.
However, you may want to take the personal control out of the day-to-day decisions. Not keen on taking phone calls from the property manager? Disinterested in going through the bills? This might be the solution.
Similarly, while you can suggest properties, you will likely have to wait for other investors to also desire a stake in that property before it can be purchased. A buyer’s agent is engaged through DomaCom to purchase their properties.
Small investment, small returns. One of the benefits of property, and one of the aspects that can make it scary, is leverage. Where you can only borrow around the rule-of-thumb 50% when it comes to shares, you can borrow far more for property, making your returns significant. You may have seen this in many property books referred to as the power of OPM (Other People’s Money).
If you go in unleveraged, then you receive rent and costs in relation to your holding. This can minimise your exposure to riskier markets, but it can also keep your growth subdued.
DomaCom explains that your own home can also be put up for a fractional investing model, which means you effectively become a tenant to the other part-owners. You can decide how many units of ownership they can have, however you will not know who the investors are. You will also find some restrictions placed on you - such as you can't renovate if it will decrease the value, and if you are renovating to increase the value and your amenity you may find that you need to pay the entirety of the improvements.
