Fractional investment in real estate is an alternative to the traditional avenues of real estate investment such as home ownership or rental property investment. It provides a different investment structure for those wanting to enter the property market. By allowing purchasers to band together to form a syndicate of co-owners, who buy ‘blocks’ in a property, fractional property investment allows people to invest without the significant lump sum deposit usually required if buying a property through a traditional financial method such as a home loan.
Fractional investment in properties is similar to investing in shares in a company. Someone buys a property for say, a million dollars, and then splits it into a number of equal ‘interests’ or ‘blocks’. Each of these interests can then be sold to individual investors for a fraction of the price of the original property. Over time, if the property rises in value, (dependent on market prices, Structural condition and more) so does the value of the ‘interest’. Any cash flow that the property generates also adds to the value of the interest that an investor holds or is paid out at a specified frequency. Fractional investment allows investors to treat a property like a company and buy shares based on how they think it will perform.
Another unique feature of fractional property investment is the possibility of liquidity. Anyone who has bought a property probably knows that it takes serious time and effort to buy or sell a property. However, interests can be sold if a buyer can be found, giving the investor the opportunity to exit the investment. There are many variables that affect how quickly you are able to sell a particular interest not limited to the attractiveness of a particular property or the buoyancy of the market.
The price of each interest differs for each property and issuer, you can search for properties and select the one which suits your needs. Other than the cost of the interest itself, there are some transaction fees as well. It might be a good idea to check for any and all fee charges before making a decision to invest.
The property management or maintenance costs will be taken care of by the issuer, who will adjust the rental payments to deduct these expenses.
Fractional investment allows the investor to diversify their holdings. You can buy shares in multiple cities, in multiple property types from the comfort of your own home. Residential homes, hotels, shopping malls, office or industrial complexes and storage units can all be fractionalised. The one disadvantage perhaps is that you won’t have operational day-to-day control over the property or tenants – since you only own a small part of the property. Some might even consider this to be an advantage as these things are then handled by professional teams hired by the trusts.
General property market risk must be considered as a major factor impacting any investment in ‘blocks’. The property market may decline, reflecting trends in Australian or overseas markets due to a range of factors including, but not limited to, the over-supply of real estate, changes in building regulations, demographic changes, interest rate movements, general economic conditions reflecting a downturn and market sentiment.
A general downturn in the property market can potentially cause a reduction in the value of a property and ultimately a reduction in the value of ‘blocks’. The acquisition price of the properties will be subject to market forces including, but not limited to, the property market, interest rates and other macroeconomic conditions.
Property-specific factors such as location, age, construction quality and design may also impact the value of the property. Each property could be negatively impacted due to a property-specific event (for example, a change in zoning), which can impact factors such as the net value, income profile and/or future cash distributions.
This risk can be mitigated through investors holding a diversified investment portfolio.
CoVESTA also assists investors to manage this risk by providing access to detailed market and property-specific data and reports (including property valuation reports), both before and after any purchase, thereby enabling investors to be better informed about market and property conditions.
The co-investment structure of the platform and consequent lower required investment per property, allows investors to spread their available investment funds across more properties and achieve greater diversification in their portfolio.
Fractional property investment provides a lower cost way to enter the property market than traditional homeownership. You should keep in mind that property values can fluctuate and there may be times where you see a fall in your investment’s value. However, if the property market increases, potentially so too, will the value of your fractional property investment.
Fractional investment in real estate is an alternative to the traditional avenues of real estate investment such as home ownership or rental property investment. It provides a different investment structure for those wanting to enter the property market. By allowing purchasers to band together to form a syndicate of co-owners, who buy ‘blocks’ in a …