Obviously, the cost of housing in Australia
has become a barrier for many young people who are seeking to buy their first home (that
is, to get their metaphorical foot on the property ladder, so to speak). Australia’s
obsession with property permeates throughout society. Recent research shows that Australians
spend an average of 2½ hours a week preoccupied with the property market. That’s more than
double the amount of time they spend at the gym, and almost three times as long as they
spend talking with their parents. Property is king. Consequently, in the last few years, fractional
property investment has become a thing. That is, property market hopefuls can now buy a
share of a single property at a fraction of the price. For example, BrickX allows you
to buy so-called “bricks” which are equivalent to 1/10,000th of the value of the property
(so $50 for a $500,000 home). At first glance, this sounds great being able to buy into a
property for only $36 or whatever, but is there a catch? Is this really helping people
get closer to their property dream? Well, services such as BrickX, DomaCom, CoVESTA,
and most recently, Lakeba with their “bricklets”, are billed as allowing individuals to get
into the property market without the large upfront expense and the hassles of dealing
with ongoing expenses. But obviously, these companies aren’t working for free. They’re
taking their own cut somewhere along the line. BrickX, for example, has a flat 0.5% fee on
all brick transactions. That is, when you buy or sell a brick, they take a small percentage.
As an example, if you purchase 50 bricks at $100 each (a total of $5,000), you’ll end
up paying $5,025. Each property also has its own monthly expenses which are taken out of
the gross rental income before divvying it up and distributing it to the brick-holders.
Basically, you get a percentage return. 1.28% in the case of this property. So why do it? Why would somebody want such
low returns? Depending on how old you are and how much money you are willing to invest,
even an online bank account can get a better return with a rate of between 2 and 2.5%.
So why do it? Why buy bricks? The answer — Capital Gains. The owners of these properties are banking
on their investments increasing in value. BrickX makes it very clear on their website
that there are two ways to make money — Monthly Rental Distributions, and Capital Returns, “As property prices change so does the value
of your Bricks. Every 6 months properties are revalued so you can keep track of performance.
Realise any capital returns by selling Bricks.” This is the figure that they want you to see,
“20yr Historical Suburb Growth”. They’re hoping that you’re hoping that the property
market is sure to rise so that you invest your precious dollars in a fragile market. But of course, they’re not out to cheat
you. Legally, they have to tell you of the potential risks. If you scroll right down
and take a look in the page footer — a place where they know most people won’t look — they
state a couple of mandatory truths: “Past performance is no indication of future performance”;
“Any forecasts are subject to change without notice”; and the big one, “Income and
capital returns are not guaranteed”. Yes, you’re risking your money by getting involved
in fractional property investment. To be fair, that’s true for any investment. But the big question, “Would I do it?”.
Is buying a small portion of a property worth it? Will it get you closer to owning your
own home? The simple answer to all of these questions as you’ve probably already guessed
by now — No! If you’re looking for somewhere to park
a little bit of your extra cash, and you’re banking on property prices increasing, then
sure, go for it! But if you want to save up for your own home, then this is wasting your
time. I’ll tell you why. Even if house prices do increase and your “bricks”, or “bricklets”,
or whatever rise in value, the cost of buying a house also goes up at the same rate. You’re
actually never getting any closer to owning your own home. I’m not trying to pick on BrickX. They’ve
seen a market that they can exploit and are trying to profit from it. Good luck to them!
But in general, in my humble opinion, fractional property investment is not a good way to get
you closer to home ownership. You’d be better off investing in some quality ETFs, or even
putting your money in a high-interest online bank account such as UBank. Become a fractional property investor if you
want to. But that doesn’t make you a property owner.