07 Jun Fractional financing – what is it? – Warren Gibson
Fractional financing is growing in popularity as a way for many people, who could not normally afford to invest in property, to do so. Warren Gibson from Domacom tells us how easy it is.
Kevin: With so many people talking about housing affordability, this may be just a unique way for you to get into the market if you are struggling. There is a company called DomaCom, and a man behind it is Warren Gibson, who joins me.
Warren, thank you very much for your time. What is DomaCom? How does it work?
Warren: DomaCom is a fractional property investment platform, Kevin. It’s simply a modern form of syndication that enables people to come together and put various amounts of money in – from a small minimum of $2500 – towards acquiring a property, and then they share in the rent and the future capital gain from that property in proportion to the amount of money they’ve put in.
Kevin: Lots of questions I want to ask you, but you mentioned the term “fractional financing.” Is that the term you used?
Warren: Yes. It’s an interesting term, isn’t it? Another term for that is syndication, and yet another one in the modern lexicon would be crowdfunding, and that’s the one that seems to resonate with most people.
Kevin: So, the whole idea here is that a whole group of people are going to put in relatively small amounts of money each but then they have some part ownership of property. Is that the way it works?
Warren: Because property has a single title, somebody has to hang on to the title, and you can’t have 20, 30, 40, 100 different people all having their names on the title. So, what we do is we put together a legal structure, and the purpose of the legal structure is to protect the interests of the investors.
When we acquire the property, it sits in a sub-fund of a managed investment scheme, a trust, and this is an ASIC-registered fund. The title rests with an independent trustee, and we use perpetual trustee for that purpose.
And then we issue units in the fund. So, you own units in the fund, the fund owns the property, and perpetual being one entity just hangs on to the title in the interests of representing the unit-holders.
Kevin: As someone investing in DomaCom, am I going to have the opportunity to decide which properties I want to invest in? Or is it that I just come into the idea of it?
Warren: There are a couple of different ways, but absolutely, you have choice – and that’s our ultimate goal. When people go into other trust types like unlisted property trusts or real estate investment trusts or something like that, somebody else chooses the property. In our structure, you get to choose what you want to invest in.
So, if you see a property that’s on the market and you want to invest in that, you can either commence a book build through an advisor, or you can come to us and we can start a book build and we can bring other people together for it.
Or sometimes we go and select a property. Recently, we selected a cattle property in Western Victoria because we had tenants lined up for it. It was an excellent property, had growth prospects and a good rental yield, and we decided that we would start a book build on that, and in the ensuing few weeks, 94 people came together and we bought the cattle property.
Kevin: Was this the Kidman property?
Warren: No, not the Kidman property. We did attempt to crowdfund the Kidman property, but as you can imagine, a $400 million cattle property is somewhat difficult to pull together.
Kevin: How did you go with that one, by the way?
Warren: We got over 5000 people who pledged $80 million. We had a major bank who agreed to leverage it for $70 million, and that was just towards the value of the land. The actual cattle business, which was the cows, we valued around $160 million. We had a consortium of businesspeople prepared to buy that part of it, so we got reasonably close, within about $70 or 80 million or something like that. But at the end of the day, it was a big task.
Kevin: If $70-80 million is getting close, well, then you were close.
Warren: In terms of $400 million, it is pretty close.
Kevin: That’s close enough. A couple of questions then for you. Okay, so I invest in this. You mentioned there at the start I think that we can share in the profits. Say I have to exit from my investment. How difficult is that for me? Is it possible, and do I share in the profits at that point in time?
Warren: That’s a really good question, and one of the issues with investing is you always have to have an avenue of exiting the investment. Not everybody is ready to get out at the same time. So, we thought about that hard and long when we were putting the structure together, that getting out of an investment is important.
When we acquire these properties and put them into a fund, we run the fund for a term of five years. When we get to five years, we ask all of the investors “Do you want to stay in it, do you want us to retain the property? Or do you want to sell it and go?” And if most of them say “Look, we would like to retain it,” we will keep it, provided those who want to get out can get out and everyone else buys them out, or we get new investors in. We’ll roll it over and keep it.
But let’s say three years after we acquired a property, somebody wants to get out – for whatever reason. Then we have what we call a liquidity facility. It’s like a secondary market, if you like, where they can go online, just like you do with your shares – you can go onto Etrade or Comsec or one of those online traders – and list your units for sale.
We can then advise other investors in that property if they want to increase their exposure to it and buy you out. We’ll do that at the latest valuation, so we revalue the properties every 12 months.
Kevin: Okay, that probably answered my question. So, there is an exit strategy there, but it’s not simply as easy as just picking up the phone and getting an agent to come and sell it for you. You have to go through a process.
Warren: No, it isn’t, but there’s no cost involved in doing that. No entry fees, no exit fees at all.
Kevin: Is there a minimum amount for me to invest, to become involved?
Warren: $2500 will open an account.
Kevin: Warren, thank you very much. The website is DomaCom.com.au. My guest has been Warren Gibson.
Thank you very much for joining us.
Warren: Thank you, Kevin.