Crowdfunding property: how to get started
Would you like to be able to invest in real estate the same way as you do in shares? Instead of buying an individual property, you could buy stakes in different properties and sectors, including residential, commercial and rural, building a portfolio as you would buying shares in ASX-listed companies.
Real estate crowdfunder DomaCom aims to enable investors to do this. In December it launched a $250 million campaign to buy the pastoral empire S. Kidman & Co.
"DomaCom democratises property investment and makes it similar to the equity market where you can get a lot of diversification with limited funds," says founder and CEO Arthur Naoumidis.
"We are the next evolution of syndicates, where investors can pool together to invest in properties with a minimum of $2500. It puts an end to the concentration risk and leverage risk you have with a single property. For example, you can invest in a $500,000 house, putting up a $100,000 deposit and borrowing $400,000. Or your $100,000 could buy a stake in several properties, giving you diversification. It's early days for the concept in Australia but globally there was $US2.5 billion of this type of investment in 2015."
DomaCom is a managed fund, enabling investors to buy units in segregated sub-funds holding individual properties or parcels of properties.
It scored an A-plus rating from Property Investment Research (PIR).
"The DomaCom platform is an innovative solution to the age-old problem of investing in real estate, which is its high upfront cost," says PIR managing director Dinesh Pillutla. "The fractional model gives investors the ability to diversify and control their investment in direct property."
It works like this. A target property is identified and a book build started. When 30% of the price is raised, due diligence is started and, when it gets to 50%, there's a physical inspection and independent valuation. This has to be within 10% of the purchase price for the deal to proceed - a protection against anyone trying to offload overpriced properties.
A current book build for stage one of Linton Estate, a retirement village development for the gay community in Ballan, Victoria, is an example. It aims to raise $650,000 for land acquisition and, at the time of writing, there had been "significant support", Naoumidis says. Further book builds will fund design and development approval and construction of the project, which is expected to have an end value of around $30 million.
Another project is 53 off-the-plan units in Melbourne and Brisbane in 10 developments. Investors with up to $50,000 will be able to buy stakes in parcels of five units, with parcels of 10 and 15 available to those with more to invest.
And although the book build for Kidman didn't reach its target, it raised $58 million from about 4000 investors, showing a strong appetite for agricultural property. Now five other rural properties are under consideration. If these proceed, they are likely to be on a sale-and-leaseback basis as DomaCom's model is to be a landlord.
Investors in these sub-funds can expect the same level of total return normally available from property of about 8% to 9%, says Naoumidis. It would be more like 20%-30% for more risky developments.
Most properties will be held for at least five years, so illiquidity is a risk. But a secondary market online is planned so, for example, if someone has $30,000 in $1 units they can trade them just as they would BHP Billiton shares.
DomaCom charges an annual 0.88% management fee plus a 0.025% transaction fee for any secondary market transactions, much like brokerage.