What are your options if you don’t have the funds to invest in blue chip property?

What is the potential ideal investment?

I’ve been investing in property for over 20 years and have hosted over 300 shows on Sky News Business interviewing the heads of the some of the best property and research companies in Australia. After each interview and as another year goes by, I am more and more convinced that the best strategy for the highest return for the least risk is:

  • Blue chip suburbs, located 3-15kms from Sydney CBD
  • A small block of 12 units with no lifts, gyms, pools or high strata fees.
  • Median priced 2 bedroom units with double bedrooms and parking.

This is because there is no more supply of properties due to the height restrictions and density of existing property. There is increasing demand from young affluent professionals who can afford the rents or property prices. And there are lots of diversified industries supporting the local economy.

However, not everyone can afford to buy in these locations as there are virtually no properties for sale and they cost $1 million + when they do come up.

So what are your options if you don’t have a 10% - 20% deposit ($100k - $200k) or the 5% stamp duty and legal's ($25k-$50k) and/or the agent's fee ($15-25k)?

Well one option that is fairly new in the market is the concept of fractional ownership.

 

What is fractional ownership?

Fractional ownership is a way of investing in one property with a group of individuals.

You would never put $1 million into one single share so why put $1 million into one single property?

Why not own 20 x $50k shares in a number of properties in different suburbs as you then still have $1 million invested in the market but the risk is spread?

 

How can you buy a fractional ownership property?

You could set up your own private syndicate of 20 other friends, family and/or colleagues to purchase a property but when you haven’t got any experience doing it, the initial legal costs may far outweigh the profits and then what happens if one party wants to sell?

A number of companies have recently set up platforms to provide the systems behind this concept and to make it more consumer friendly. They ensure the legal side of things have been set up correctly and they also provide a market so that the shares can be bought and sold in the future. Each platform has their own specialty and will suit different investors for different purposes.

 

Who could fractional ownership be good for?

If I had $1 million I would prefer to buy a whole property myself as:

  • I can often get 80%-90% finance which means I only need to put 10%-20% down.
  • I then control it 100% and so can dictate if and when I renovate, when I want to refinance the equity out and when I want to sell (if ever).

However, I think this fractional ownership model is advantageous for those that:

  • Have a limited deposit
  • Aren’t able to service a larger mortgage
  • Are non-resident in Australia and are struggling to borrow
  • Have funds in superannuation but prefer to invest in property rather than shares
  • Would prefer a share in a blue chip property rather than buying interstate or overseas in a suburb they’ve never heard of

 

Difference between DIY and Fractional Ownership

There is a cost charged by the platforms to manage multiple owners in a fractional ownership program, but it is typically a small cost and insignificant in the overall scheme of things, especially when split across 20+ shares

Rather than concentrate on what things cost, I always look at the potential net return I make for the time, money and risk I put into investments.

Here are some of the costs involved.

  Own 100% yourself Fractional
     
Who controls decisions? You Fractional manager
Is it passive or active? Active (unless outsourced) Passive
Leverage Up to 80-90% Up to 30-40%
Sell Anyone, anytime Via the platform or to Your Empire
Buying Fees 2% buyers agents fees 2.5% fractional ownership fees
Property Management Fees 5-6% 5-6%
Fractional ownership ongoing costs   5% of rent

 

Here’s some projected based on 10% p.a. growth over 10 years just to be used as a comparison tool.  I used 10% to keep the figures simple, so it would worth doing the same figures at 5% growth.

 

Summary

 

 

Fractional

0% Borrowing

 

Fractional

40% Borrowing

 

DIY

80% Borrowing

             
Deposit + cash flow  

$1,085,000

 

$670,000

 

$300,821

             
Debt  

$0

 

$400,000

 

$800,000

             
Total cost  

$1,085,000

 

$1,070,000

 

$1,100,821

             
1/20 Share Cost  

$54,250

 

$33,500

 

$15,041

             
Net Return after sale

$1,835,833

 

$1,679,983

 

$1,552,984

             
Net Return / Share  

$91,792

 

$103,999

 

$77,649

             
% return on deposit  

169%

 

310%

 

516%

 

Is fractional ownership right for you?

Your Empire is not licensed to give financial advice. So before going ahead with this or any other investment you should get independent legal advice from your appropriately qualified accountant or financial planner.

 

What are the risks?

There is a risk in any investment, no matter whether you own 5% or 100%. The more due diligence that is undertaken, the more blue-chip you buy and the longer time frame you look at holding it for will generally reduce that risk.

The individual platforms will be able to provide more details as to their particular structure of ownership and your independent accountant or financial planner should be able to advise you more on your personal circumstances.

 

What is Your Empire’s role in this?

As property investor's we can help to explain some of the pros and cons on the more practical or property side of various strategies.

As specialist buyers agents, we are experts in trying to find you the right property at the right price that we believe will make you the most money for the least risk. These properties are very hard to identify and when we do find them they’re very hard to acquire before they go to auction and sell at a premium. It’s our expertise and 10-20+ year relationship with the local agents that enables is to do that.  We only buy a property if I would buy it for my own portfolio.

These properties are very hard to identify and when we do find them they’re very hard to acquire before they go to auction and sell at a premium. It’s our expertise and 10-20+ year relationship with the local agents that enables is to do that.  We only buy a property if I would buy it for my own portfolio.

We only buy a property if I would buy it for my own portfolio.

 

Are all fractional ownership properties good to buy?

I personally wouldn’t buy a lot of the properties that are on these various platforms as either they’re not in my ideal suburb, not in the best street, haven’t got the fundamental attributes I look for or aren’t at the right price. So I’m looking to use the platforms to have “Your Empire’ purchased properties that are just for Your Empire clients rather than the general public. These will be in the suburbs that I would choose, they will be purchased off market / before auction and they will have gone through our own due diligence process above and beyond that of the platform that we choose to use (independent full valuation, strata check, building inspection, independent rental assessment separate to selling agent).

So I’m looking to use the platforms to have 'Your Empire’ purchased properties that are just for our clients rather than the general public. These will be in the suburbs that I would choose, they will be purchased off market / before auction and they will have gone through our own due diligence process above and beyond that of the platform that we choose to use (independent full valuation, strata check, building inspection, independent rental assessment separate to selling agent).

 

Is this a fad or has the concept been around for a while?

I personally use a similar concept for a $1m luxury motor yacht I partially own which is also called syndicated or fractional ownership. Why pay for a boat every day when you don’t use it every day?

Instead, I pay $125k for a 1/8 share and get to use it 1/8 of the time. The majority of owners still don’t even get to use their full allocation of 43 days/year. So rather than pay $1million to own the boat outright, I can have a similar use for $125k and have $875k left over to put to better uses i.e. for investment property that makes a profit that then pays for the boat.

If you fractional ownership is something for you would like to explore the model with Your Empire then please email luis@yourempire.com.au.

Warm regards

Chris Gray

 

 

Advice Warning: All content and information provided on this webpage is general advice and for educational purposes only. None of the information contained within this letter or at the event constitutes, or is intended to constitute, a recommendation by the presenter that any particular security, investment or strategy is suitable for any specific person. None of the information contained in the letter is, or is intended to be, personalised investment advice. All readers of the letter should make their own independent decision regarding them.

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