Fractal property investments: dipping your toe into the property market

Jul 23, 2018

It’s no secret that property is expensive in Australia – it can be pretty disheartening for those trying to get into the property market especially if you’re trying to buy your first home.

So, in today’s episode we’ll be covering off how to buy property using what’s called a fractal investment. It’s about getting into the property market in small increments rather than the traditional way.

1. Getting into the property market can be risky, costly, time consuming.
2. Rather than buying a full property yourself, you buy a portion (fraction) of a property – “Fractal property investments”
3. There has been an increase in fractal investing over the past few years as people have been having trouble getting into the property market by buying property outright.
4. People struggle to
   • Build deposit – most cases $60k to $100k in cash savings
   • Getting a loan – banks are tightening requirements
   • Have time to find property (want to make sure it returns) or manage it
     • Option of Buyers agents
     • Property managers
   • All of these together go in the too hard basket

What are the alternatives?

1. Online property investment platforms
2. Allow for the investment into property for around $100 at a minimum, rather than buying the property outright

Two companies doing this - Brickx, CoVesta

How do they work?

1. Unit Trust Structure
   • Trust is created with 10,000 Units - Trust buys the property
   • Gearing – Generally levels don’t exceed 50%
2. Select a property you like
   • Buy your Bricks/Blocks
   • Transaction fees: 1.75%
3. Earn rental income - Distribution payment calculation
   • Gross Rental Income – (strata levies + water rates + council rates + maintenance + management fees + annual audit and valuation fees + property taxes + debt interest + principal repayments + other costs) = Net Rental income
4. Capital returns
   • Valuations
     • Independent external property valuations are performed semi-annually
     • Serves as a price guide – Not what the units are sold for
     • Valuations go up – Guides for what bricks should sell for does as well
     • Shares example – Almost like valuations vs price
   • Price of the units – Based on supply and demand
5. Sell the Bricks at a later date
   • If you want to sell – list your units for sale
     • Members have to then buy this off you
   • What you sell for – Brick Price is determined by Member Supply and Demand
   • Selling Brickx – List the Brickx sell price and number you want to see
   • Average sale time is about 22h 1m.

Whilst these investments are quite liquid, it can be a double-edged sword;

The Pros

1. Start building a property investment portfolio
2. Diversification – Buy units in a range of properties
3. No hassle – Easy to purchase and takes care of management
4. Structure – Unit trusts are transparent
   • No risk to you if other owners going default

The Risks:

1. Run on property – If lots of people list and no buyers, then values go down
   • Someone has to be willing to buy you units (brickx/blocks)
   • Unit trusts can be frozen if too many people try and sell
2. Gearing – Capped at 50% in most cases
   • Good for protection against declines
   • Bad against
3. Interest only loans
4. You don’t get any of the tax offsets
   • Trust structures don’t allow the losses to flow through

Summary

1. Good way to get a toe (or toe nail) into the property market
2. Easy way to start the property investments
3. Not without risks though – Likely to be more volatile if everyone tries to sell

Thanks for listening!