Three forms of investing in real estate that don’t require the outright purchase of a property, or offer a unique twist on ownership, are becoming increasingly popular.
Rentvesting is an option increasingly favoured by young buyers, who buy and rent-out one property in a market they can afford, and then rent a different property in the area they want to live.
First home buyers and investors are also early entrants in a new disruptive trend called “fragmented property ownership”, in which you own a percentage of property under title, which you can sell at any time.
A third strategy focuses on real estate investment trusts, known as REITs, which operate like a shares portfolio that is managed by a professional organisation and can be traded on the stock market.
Here, we dig a little deeper into each option:
Rentvesting
The concept of “rentvesting” is simple – buy what you can afford, and rent where you want to live.
This breaks the traditional approach of buying a property and living in it.
If you have a good job but insufficient equity and cash-flow to buy property in areas such as a CBD or inner-city, rentvesting is a great play.
The key benefit is receiving rent from tenants living in your newly purchased property, which helps you meet the mortgage payments. However, there are capital gains tax implications from being a landlord, so seek advice from a financial adviser.
You should also regard rentvesting as a long-term strategy as capital gains can take a few years to realise. Properties bought as an investment option are also not likely to be suitable for a first home buyer grant.
Fragmented Property Ownership
Thanks to start-ups such as Bricklet, it is now possible to purchase a slice of a property that is co-owned with others.
You could own one-tenth of a house with nine others, for example – and that means you don’t have to sink hundreds of thousands of dollars into a single building to be a property investor.
Smart investors are laying bets across the residential and commercial sectors by purchasing fragments of properties in areas that they believe will experience the fastest rising prices.
Fragmented ownership is proving popular with Self-Managed Super Funds, where a diversity of investments, fiscal stability and liquidity are important.
Blockchain underpins the transaction process, so participants in this fledgling market can buy and sell their slices of property ownership online. Investors in fragmented properties may also receive their share of rental returns.
Real Estate Investment Trusts
These trusts consist of a pool of money from multiple investors that focuses on commercial properties, such as hotels, malls, offices and apartment buildings.
The most common type of trust is known as an Equity REIT. These buy and then lease properties, just as a landlord might. Many of these funds specialise in a specific type of property, such as hotels. They attract investors because of their expertise in a particular segment of a market.
The second type of trust is a Mortgage REIT, which loans money to property owners for either mortgages or mortgage-backed securities. Instead of earning income from rent or lease payments, these trusts generate income from interest paid on their loans.
Investments in both types of trust can be traded on the stock market, and they can pay dividends as a result of annual profits, thus giving their investors a revenue stream.