How fractional investing leads to ownership

By Mark Rosanes | 27 Jul 2020

The coronavirus pandemic may have thrown a wrench into the homeownership plans of many Australian renters, but an industry expert says that opportunities still exist amid the crisis.

“The key impact of COVID-19 in the property market is an increase in vacancy and pricing risks resulting from the increase in unemployment that has occurred and is expected to increase going forward,” says Arthur Naoumidis, founder and chief executive officer of property investing platform DomaCom.

“The traditional path to ownership for a renter is made more difficult in this environment because of the tightening lending conditions, let alone the low interest rate environment for building a deposit.”

Naoumidis says that several government initiatives, including the HomeBuilder and First Home Owner Grant, will help a proportion of aspiring homeowners get on the property ladder. However, these schemes provide limited cover.

Fractional investment and the path to ownership

Given the current challenges, Naoumidis believes fractional investing is a sound strategy many Australians can take advantage of.

One of the biggest benefits of this approach is that it entails a low barrier of entry compared to conventional property investment. The scheme also doesn’t require investors to shell out a 20% deposit as they can own a share of a property for a small initial outlay.

“Fractional investing allows investors to invest in a ‘fraction’ of a property much like they invest in a ‘fraction’ of a company, which reduces the barrier to property investment to as little as $2,500,” Naoumidis says. “Additionally, fractional investing allows renters to progressively purchase more interest in the same or other properties over time and allows them to build the deposit with their savings being in the property market.”

He says at some point in the future, “renters can sell their property fractions and use the proceeds to purchase a property in their own name if they wish.”

Rent-to-own property investing

According to Naoumidis, this is how DomaCom’s recently launched rent-to-own (RTO) scheme works – the model allows tenants to “escape the rental cycle by participating in the equity model” without incurring additional costs to their rent.

Under the scheme, tenants pay rent on a commercial basis and, after costs and interest on any loans have been covered, the rent is shared between the unit holders in proportion to their investment. Any increase in capital value over time is also shared.

Naoumidis explains that tenants of the company’s RTO property will receive 1% equity per annum for a maximum of five years made possible through the initial discount DomaCom has negotiated with the developers.

“This immediately results in the tenant getting on the property ladder by having an ownership interest in the property they are renting,” he says.

Over time, tenants can also acquire additional equity from investors to increase their share in a property as and when they can afford to do so. Naoumidis says this could “be a much better place to save for a house deposit as the tenant may end up owning much more than the 5% we gift them over the five-year term of the RTO investment.”

He also expects the leasing incentive to reduce the vacancy risk associated with rental properties and make these properties more attractive to investors.

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