Fractional real estate investment allows young people to access the real estate market, but at what price?

Fractional real estate investing allows you to own a small equity stake in residential or commercial properties, such as apartments or business parks.Fred Lum/The Globe and Mail

A backdoor has opened for young adults who want to own property, but find themselves out of the market.

Fractional real estate investing on platforms such as BuyProperly and Addy allows you to own a small equity stake in residential or commercial properties, such as apartments or business parks. You cannot live in these properties, but you can benefit from them if they are later sold at a profit and receive a small rental income while you wait. You could also lose money if a property is sold for less than the purchase price.

Split investing is officially a thing. Wealthsimple Trade allows you to do this with an increasing number of shares, and it is also possible to buy part of the ownership of art, stamps and royalties generated by music. But fractional real estate investing is by far the biggest breakthrough, both useful and useless.

The positives are as much emotional as financial. You can invest successfully throughout your life without direct ownership, but a lot of money has been made in real estate lately and those who can’t afford to buy are feeling the burn. Fractional real estate investing responds to this frustration.

But it’s also fueling a trend called the financialization of housing, where homes are treated as commodities and investments. Along with low interest rates and lifestyle changes brought about by the pandemic, the financialization of housing explains why house prices have risen so much.

The home buying versus renting debate is over – the rental was lost and it was never close

These numbers show just how much of a deciding factor your parents’ wealth is for first-time home buyers.

We see financialization in the growing number of people who own multiple properties. Why sell your first home to move up a gear when you can own two properties? Another example is that of a Toronto condo developer, Core Development Group Ltd., which buys single-family homes to rent out. The Canada Mortgage and Housing Corporation recently created a Financialization of the Housing Lab to study the trend.

BuyProperly is a fractional investing platform where you invest a minimum of $2,500 in a home or condo and receive both a quarterly stream of rental income and the potential profit when the property sells.

“Fraction real estate investing is buying shares of a house like you buy shares of a company, basically,” said Khushboo Jha, founder and chief executive of BuyProperly.

BuyProperly makes money by charging a fee set at 2.5% of your initial investment. Ms Jha said that after applying these fees to the rental income paid by tenants, you are left with a return of 1-2% per year while you wait for a property to sell.

With Addy, clients pay an annual fee of $25 which allows them to invest as little as $1 in commercial properties such as apartment buildings and business parks, with a limit of $1,500 per property .

“Let’s say there’s an apartment building available in a neighborhood and it costs $1 million,” said Addy founder and CEO Michael Stephenson. “Addy will buy it, and then we’ll issue a million shares, each for $1, and anyone, including the building’s tenants, can own part of the building.”

Money invested through BuyProperly is technically locked in for five years, but the company maintains a secondary market for people to sell before then. Addy’s lock-up periods range from three to 10 years, and there’s no way to sell your holdings ahead of time.

BuyProperly has about 300 investors who have purchased about 11 transactions over the past year, while Addy’s roughly 7,000 investors have a stake in about 15 properties. Fractional real estate companies are not yet buying enough properties to fuel demand and, therefore, prices. But that’s where we could be headed if the financialization of real estate spreads – more buyers looking for limited supply.

BuyProperly’s Ms Jha challenged that real estate being treated as a commodity is something new. “I would say real estate has always been a financial asset,” she said. “It just wasn’t available to ordinary people.”

BuyProperly customers fall into two main groups: young people in their twenties who aspire to buy a home in the future and people who already have a home and want to invest in a second property without making a big financial commitment.

The properties for sale on the site have largely been located in Ontario – in places like Hamilton, the Niagara region, London and Ottawa. Perhaps reflecting the impact of the financialization of housing, there is nothing for sale right now in Toronto.

“We weren’t able to target anything in Toronto,” Ms. Jha said. “We’d love to do that and customers would, but it doesn’t make sense, in terms of returns.”

Coming soon: an investor’s perspective on fractional real estate, including fees and risks.

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Penny D. Jackson