There is an asset class which is bigger and far more liked than equities. Of course I’m talking about property.
But it can be an asset class which is out of the reach for many to invest in, to get a foot on to the property ladder.
Generation Y is sometimes known as Generation Boomerang, because of their tendency to move back in with mum and dad.
For this generation, it’s the only way of saving for a home or to buy an investment property. Young couples putting money in a bank for a house deposit is as far as they will ever get on the property ladder, as they despairingly watch property prices soar ever more out of their reach.
Even if you can take the first step, there remain problems to property investing.
With such a large outlay, it’s very hard to diversify. Most property investors own just one property. Doing that you are concentrating an awful lot of risk. What if you buy an investment property in the wrong location, or later have some regrets?
Another drawback with property is liquidity. You cannot buy and sell quickly if forced to, without occurring some sort of transactional loss.
All those hurdles and drawbacks to investing in property are about to change, with the soon to be listed DomaCom.
For the first time, the emergence of fractional property investing platforms like DomaCom are allowing property investment for all.
DomaCom has created a platform which allows investors to invest in a part of the property. What DomaCom does is take property assets and cuts them up into bite sized chunks for investors.
Should the property be successfully purchased, investors immediately get their share of the rent and their share of any capital gains should the property be sold down the line, just like any standard property investment.
With their low minimum of two and a half thousand dollars, nearly anyone can invest in property.
It’s one more reason why property can go higher from here.
Most investors have just one property. You’d never do that in equities, so why would you be doing it in property? Because until DomaCom came along, that was the only way you could invest in property.
What DomaCom, and others like it are doing is taking equity concepts and applying them to property.
For example, in the stock market if you had $100,000 to invest, you wouldn’t put all your eggs into one basket and buy one company. You’d most likely buy 10 companies. You’d spread your risk and diversify.
Previously if you were to take that $100,000 to buy property, your only way would be to take on a mountain of debt and hopefully buy some apartment at half a million dollars. That leaves you exposed to asset concentration and leverage risks.
Now you can take your $100,000 and if you wish, spread it across 10 different properties, just as you would equities. And investors choose which properties they want.
Now many of the risks which come from owning one property are mitigated. For example, with a spread of property assets and a diversified property portfolio, the chance of all properties being untenanted at once are practically zero.
How it works is investors pool together to buy a property they would like to invest in. When the pledges, or what they call ‘book builds’ get to 30% of the price target, they begin due diligence. At that point they engage a conveyance solicitor to check the contract and title. When the pledges get to 50% of the price target, DomaCom start on physical due diligence; building inspections, pest inspections, full valuations and the like.
If they achieve 100% of the target, all investors vote to go ahead with the offer and DomaCom are successful in purchasing the property, you immediately get a share of ownership in the property. DomaCom collect the rents and the same day they receive it, they give you your share. If you own 10% of the property, you get 10% of the rent immediately.
There are two sets of fees. Firstly, the same fees you get if you were to buy a property yourself. Valuations, inspections, conveyance checks, all of those are there and you pay your share of that. DomaCom make no money from this. Also DomaCom have no entry or exit fees.
What they do charge, and where they make their money from, a percentage of the gross assets every year, at 0.88% per annum of the value of the properties. This essentially makes DomaCom an asset manager.
As I already mentioned, another problem with property is liquidity, and DomaCom has solved that problem as well.
Every individual property fund has a defined period, normally five years. At the end of five years, all investors vote to renew or to sell the property.
It must be a 100% vote to renew.
If 99% want to renew and 1% don’t, investors who want to renew can buy that 1% out at the current valuation.
At any time investors can vote to wind up the property investment. If 75% vote to wind it up, the property is sold and everyone is given their share.
But DomaCom take liquidity measures even further. The company has obtained market maker permissions. It’s a process very similar to shares. If you want to sell your units, you can offer them for sale on the secondary market. There’s a bid and offer process exactly like shares.
These sorts of platforms are still in their infancy, but don’t underestimate what could happen to property prices if platforms like DomaCom really take off.
It’s not a company starting from scratch. The website is functioning, it already has 59 property book-builds in progress, adding to the 24 properties already acquired. When it lists in a couple of weeks, it will hit the ground running.
And you’re probably starting to think like me, what market penetration will DomaCom achieve? Whatever figure you come to, times it by 0.88%. That’s the returns they will get. If DomaCom takes off, it could be massive. One for the watch list.
There’s always something that presents to keep the real estate cycle turning. Analysts and fund managers have been calling for property prices to fall year after year, and they continue to get it wrong.
Subscribers to Cycles, Trends and Forecasts know how the economy turns, and how it can be forecasted.
Joe Public is going to struggle to understand how this will affect property prices, but when you see what’s happening this cycle with DomaCom and the like, this real estate cycle is really starting to build.
It’s all unfolding to script so far. To see what’s coming next for the economy and how you can time it all to your advantage, go here.
All the best,
Lead Researcher, Cycles, Trends and Forecasts
From the Port Phillip Publishing Library
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