Sharing is caring!

Well, now you can. Learn about ‘Fractional Investing’ with this Australian Case Study.

Before moving to the Sunshine Coast and joining Omnia Group, our compliance manager David Heycock spent some time working in real estate in Melbourne. Whilst there he decided to take a closer look at a brand new way of investing in property called ‘fractional investing’. This case study shows how David’s clients purchased a high-value, investment grade property with each of them only investing small amounts of cash and with no borrowings.

So what is Fractional Investing?

In simple terms, Fractional Investing involves buyers purchasing a fraction of a property rather than the whole property. It’s really not much more complicated than that.

To test the idea, David selected a new property, a brand new apartment at 55 Gaffney St in the growing suburb of Coburg just outside the Melbourne CBD.

GXC Apartments – Coburg

 The property David chose:

  • A 2 bedroom apartment with 1 bathroom and 1 car park and nearing completion
  • Sale Price $440,000.
  • Overall design, the layout and the finishes were excellent
  • Located directly across the road from Batman train station – a short ride to the Melbourne CBD
  • Potential up to 5% pa gross yield and net 3.2% pa
  • Similar property had recently sold just up the street for more
  • Developer personally known to David and was of sound reputation
  • Vendor threw in a 6 month rental guarantee @ 4.5%pa and also included $5,000 worth of extra fittings.

David arranged a standard real estate agency sales agreement with the vendor and then went to DomaCom, an Australian public company which has established a property listing exchange which in some ways is similar to the Stock Market. The property is listed on their exchange and investors can buy and sell their share of a property by trading their units

DomaCom only accept properties which meet their strict criteria so they checked out the Gaffney Street property thoroughly before they agreed to list it.  

Lazy money

It turned out that a significant number of clients known to David had ‘lazy’ money that was looking for a home. That is, they had funds which they wanted to invest in property but which were not enough to buy a property outright.

It only took eight clients to buy the Coburg property and they each signed immediately with DomaCom to invest a total of $475,000 (the purchase price plus 8% extra to meet out-of-pocket costs). DomaCom provided a full Product Disclosure Statement and processed each person’s investment under their general AFSL license.

  • The client’s funds were then invested into individual cash accounts at @ 0.6% above the cash rate so they earned whilst the construction moved to completion
  • The whole process was very simple and straight forward
  • No complex structures involved – so easy to understand
  • No borrowings were used in this case but DomaCom would allow borrowings of up to 45% of the purchase value if they were needed
  • These investors wanted to generate income so the potential cash yield of up to 3.2% pa + capital gains was particularly attractive.

 

The fees and outlays involved were as follows:

  1. No up-front or extra fees were involved over and above the usual costs which apply when buying a property.
  2. Once the funds were raised, DomaCom had the property valued, entered into the purchase contract with the vendor and a 10% deposit was paid.
  3. If 100% of the funds had not been raised all monies would have been returned to the investors in full with interest. No penalty fees would have applied.
  4.  At settlement the balance of purchase price was be paid and out-of-pocket costs met e.g. stamp duty, solicitor’s fees, conveyancing fees etc. Any funds left over were returned to the investors with interest.
  5. DomaCom charged a listing fee of 0.88% pa of the total value of the property.
  6. Standard rental management fees will apply @ 7% of the gross rental

 

After settlement:

  1. After settlement investors now have the option of holding their share of the property for 5 years at which point the property will be sold unless 75% of them elect to hold for a further 5 years.
  2. The investors are able to sell all or part of their investment at any time as the DomaCom model allows for a ‘liquidity market’ to be formed.
  3. Value of Shares in the property is reflected in the annual valuations DomaCom do as part of their listing service.
  4. Total outgoings should be in the order of $7,912pa in which case the net cash return to investors would be 3.2% pa

 

It was very simple:

  • there are no ‘hidden fees’,
  • investors have a direct ownership of the property via the DomaCom trust structure,
  • they can invest whatever amount they can afford or are comfortable with,
  • the investment maturity is fixed but can be extended,
  • even if the investors decided to borrow to invest in this property there would have been no individual borrowings for them to worry about as all DomaCom properties are cash flow positive and the lenders loan against the property only (have no charge against the investors).

Given the success of David’s Coburg venture, Omnia is now putting together great investment properties for our clients. We already have superb properties available for purchase with a minimum investment of just $10,000.   

Are you interested in learning more? Contact the Omnia team today.

 

Written by

David Haycock
Consultant
OMNIA