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.