Fractional investing, also known as fractional ownership, is a new trend in the Australian property market that allows investors to own a fraction of a property rather than the entire property. Fractional investing provides several benefits for investors who are seeking to invest in the property market but may not have the financial resources to purchase an entire property on their own. In this article, we will discuss the benefits of fractional investing in property in Australia.
1. Affordability
One of the main benefits of fractional investing in property is affordability. Fractional ownership allows investors to purchase a portion of a property, which can significantly reduce the amount of capital required to invest in the property market. This makes property investment more accessible to a wider range of investors, including those who may not have sufficient funds to invest in a property on their own. To purchase a $500,000 unit in Melbourne the average property investor would require a 10% deposit plus costs such as stamp duty, legal fees etc around $80,000 assuming a 90% loan of $450,000. Saving for the minimum $80,000 can take years and is often out of reach for the majority of people in Australia with only 20% of Australian's owning an investment property.
2. Diversification
Fractional investing also provides investors with the opportunity to diversify their portfolio of investments. By owning a fraction of several different properties or even different property classes (residential, commercial and international), investors can spread their risk across multiple assets and reduce the impact of any one property on their overall investment portfolio. This can help to minimise the impact of any fluctuations in the property market on the investor's overall portfolio. With a minimum investment from as little as $10,000 one investor can spread $30,000 across three different properties.
3. Reduced Risk
Fractional investing can also help to reduce investment risk. With fractional ownership, investors only own a portion of a property, which means that they are not exposed to the same level of risk as owning the entire property. This can be particularly beneficial in the event of a property market downturn, as the risk is spread across multiple investors rather than being concentrated in one individual. Fund managers that own the property in a fractional sub-fund are responsible for ensuring there is a sufficient buffer for unforeseen circumstances such as rental vacancy and repairs and as a result the fund usually hold 3-6 months of rent as a buffer when they establish the fund.
4. Hassle-Free Management
Another benefit of fractional investing in property is that it provides hassle-free management. With fractional ownership, the property is managed by a professional fund management company, which takes care of all aspects of property management and maintenance, including tenant selection, rent collection, property maintenance and repairs, and property taxes. This means that investors can enjoy the benefits of property ownership without the hassle and stress of managing the property themselves.
5. Easy Entry and Exit
Fractional investing also provides easy entry and exit options for investors. With fractional ownership, investors can easily sell their ownership share in a property if they need to liquidate their investment or if they wish to invest in a different property without paying an agent to sell the property. The incoming buyer will buy the outgoing investor's units at the most recent valuation (usually valued 2 x per year) and will not have to pay stamp duty. This provides investors with greater flexibility and enables them to adjust their investment portfolio to meet their changing financial goals and circumstances.
6. Access to Premium Properties
Fractional investing also provides investors with access to premium properties that may be out of reach for individual investors. By owning a fraction of a premium property, investors can benefit from the capital appreciation and rental income potential of high-end properties that would otherwise be beyond their financial reach. In simplistic terms, an investor with $50,000 can purchase a 10% share in a $500,000 property or a 5% share in a $1.0m property.
7. Passive Income
Fractional investing provides investors with a passive income stream in additional to capital growth of the property. With fractional ownership, investors receive a share of the rental income generated by the property after payment of fund management fees, which can provide a steady source of income. This can be particularly beneficial for investors who are seeking to generate passive income to supplement their existing income streams or to build a retirement nest egg.
8. A Stepping Stone to Owning Your Own Property
An investor who cannot afford to purchase a property on their own can own a fractional investment in a property or several properties and after a period of time they can sell their units and purchase their own property outright. This is possible due to the underlying property growing in value of time. Properties in a fund are typically valued twice a year and investors can benefit from capital growth like any other property.
Conclusion
In conclusion, fractional investing in property provides several benefits for investors offering an affordable and accessible entry point into the Australian property market.
However, as with any investment, it is important to conduct thorough research and due diligence before investing in fractional ownership of a property. Investors should seek professional advice to ensure that they fully understand the investment risks and potential returns, and that the investment aligns with their financial goals and circumstances.
If you want to know more about fractional investing or are looking to invest in a fractional property investment contact our team at The Property Room.