If you’ve always wanted the monthly rent cheque that comes from owning a tenant occupied residential property but can’t afford to purchase such a property, you may wish to consider fractional property investment.If you’ve always wanted the monthly rent cheque that comes from owning a tenant occupied residential property but can’t afford to purchase such a property, you may wish to consider fractional property investment.
Home prices continue to soar in Australia, leaving not only residential home buyers out in the cold, but investors as well. Median home prices in many large cities are over $550,000. According to recent stats released by the Australian Bureau of Statistics If you want to buy a house in Sydney, expect to pay more than $679,000 for the average home.
However, fractional property investments allow home buyers and investors alike an alternative method for participating in the housing market.
In this article, we’ll discuss how you can still grab a portion of that monthly rent cheque for a fraction of the cost and hassle that goes with owning and managing the entire property.
Fractional property investment allows you to purchase shares in a property. This allows you to collect a proportionate amount of any income produced by that property without having to maintain its upkeep, pay related taxes and any of the other costs pertaining to owning a home.
You might be wondering, what exactly is meant by fractional? In fractional investment, a property could be for example, divided into 100 blocks to make up 100 per cent of its purchase price. By utilising a fractional investing platform, investors can get started by investing as little as one per cent of a property’s purchase price (plus any associated fees or taxes). This substantially lowers the amount required to invest to get a foot into the property market when compared with the standard home loan deposit of 20 per cent.
Because a property is sliced into shares, there are basically multiple landlords and multiple ‘shareholders’ instead of just one.
How does fractional investing help tenants? By lowering the amount of money an investor needs to enter the property market, fractional investing provides increased opportunities for investors to purchase a stake in a property. With more people having access to the market, fractional investing increases the housing supply for renters, which can in turn, offer tenants more rental options.
An investor is also able to opt to ‘Invest & Rent’ by becoming a co-owner of a property with as little as 5 per cent of the purchase price (plus costs). As the tenant, the ‘Invest & Renter’ will pay market rent (or 4%) to live in the property and also receive back their share of the net rental income (less expenses).
Unlike a Real Estate Investment Trust (REIT), fractional property investing allows you to target a specific property to invest in. This means you can perform due diligence on a property and then purchase shares in that same property, rather than a pool of potentially unknown properties.
Additionally, fractional property investing allows for investing in residential properties. Currently, there aren’t any ASX-listed REITs based on Australian residential properties.
After purchasing shares in a particular property, you can then continue researching and learning about the property’s potential. If at some point, you don’t like the property’s prospects, you may be able to sell your interest in the property.
Some of the benefits of fractional property investing include the following:
As with any investment, however, fractional investment does not come without its own risks. Over and above the risk of fluctuations in the yields payable or the underlying value of the property there are risks specific to fractional investment, including; liquidity being limited to any prescribed sale events, or the ability for the investor to find a willing buyer for their fraction of the property; or the risk that the investment opportunity does not attract sufficient investors to complete the property acquisition.
Given the benefits of fractional property investing, how do you really decide if it is right you? If you have been wanting to start investing in income producing property but simply don’t have the large amount of capital needed, fractional property investing can provide a great opportunity for getting started.
It also can be an excellent form of growth investing. As a property appreciates, investors will see a gain in the value of their interests. However, you should keep in mind that property values can fluctuate and there may be times where investors can see a fall in the value of their interests.
If you think fractional property investment is suitable for your circumstances, it may be worth pursuing. Once you have considered all the potential risks and benefits and feel comfortable investing, you’ll be risking a smaller amount of capital (as compared to buying an entire property outright) but more importantly, you’ll go in with an understanding of how the investment works and potentially earning a return.
If you’ve always wanted the monthly rent cheque that comes from owning a tenant occupied residential property but can’t afford to purchase such a property, you may wish to consider fractional property investment.If you’ve always wanted the monthly rent cheque that comes from owning a tenant occupied residential property but can’t afford to purchase such