Achieving a ‘model’ portfolio in property is difficult if not impossible because of the singular high cost of each property. If you recommend an asset allocation to property of, say 20 per cent it is certainly impossible to acquire multiple properties unless the value of the underlying portfolio is in the millions, or a very large debt is created.
Your role as financial adviser is to deliver an outcome that satisfies as much as possible your client’s preferences whilst mitigating the risk. Property is an asset class where a single property can blow the allocation out of the water leaving the portfolio at risk. In a SMSF a single property investment could account for 80%, 90% or more of the portfolio leaving the trustees in a difficult position should they be approaching pension phase or urgently need liquidity.
But using a fractional model you can put an investor into as many as 10 properties with as little as $20,000. Taking an average SMSF of $500,000 and a 20 per cent asset allocation you could model a portfolio of 10 properties quite easily with $10,000 in each. If you can assemble 50 clients in your practice or across your representative base you can successfully book build $5 million worth of property.
Extrapolate that across an average client base and you have the makings of a strong property portfolio. What’s more you are protecting your clients and enhancing your service offer.
Issues that your clients need to understand > Liquidity and Tax.
On the subject of liquidity, one of the most common issues is the ability to exit a property investment. Unlisted property trusts have liquidity issues and many are still frozen from the GFC. REITs too are subject to buyers on the ASX, but at the very least a seller can reduce their bid price to get a timely exit.
In the DomaCom fractional property model a unit holder can list their units (some or all) for sale online at the prevailing valuation and if necessary reduce their bid. As the secondary market gains traction there will be many more buyers vying to get their foot on the property ladder over the longer term so we see a deeper market emerging over time. But the market has to start somewhere so best to ensure investors are longer term as much as possible.
When talking property there are always questions around land tax, stamp duty and CGT so let’s take a moment to focus there in relation to the fractional model.
Initial property purchases by the Fund attract stamp duty, but secondary trades do not. This is because secondary trades involve units and not the property title which stays with the Trustee. Land tax is as it normally is, payable. In the fractional case the cost is spread between unit holders in proportion to their holding. And CGT is, as always, a matter for the individual investor.
The DomaCom Fund is a specialist product that requires the adviser to be accredited to use it. Details are available along with further information on the DomaCom Fund and the fractional style of property investing at www.domacom.com.au
