This is called fractional ownership, and it allows individuals to buy a share in a single house, apartment building, or industrial park. Vancouver-based startup Addy and Toronto-based BuyProperly are among the emerging “fintech” and “proptech” sectors, which are using technology to disrupt the financial and real estate sectors.
Devine Reviews, associate professor of real estate at the Schulich School of Business at York University, said the industry is “poised to be disrupted because we have been operating the same way for so long.”
She believes fractional ownership could be very appealing to Gen Zs and Millennials.
Experts say the concept of fractional ownership opens up a new avenue for participating in real estate while reducing costs, but there are potential issues as well.
How it works?
The selling point of fractional ownership is that even if you don’t have a down payment on a house or can’t finance a mall, with a few mouse clicks to register and an electronic funds transfer (EFT) to pay for your investment, you could become a part owner of a property.
Addy and Buy correctly basically crowdfunding a real estate purchase by attracting investors online.
BuyProperly focuses on the sale of shares in rental homes in Ontario. Addy deals with properties worth $ 5 million to $ 50 million, such as apartment buildings and industrial parks, with investments in British Columbia, Alberta and Ontario to date.
Both have a small inventory of investment property on their websites and say they’re looking for more.
In Australia, Inde and the we, companies offer different options for fractional ownership – for example, a US company sells shares of agricultural land.
Addy and BuyProperly say they have regulatory approval to sell investments and claim a trade can be completed in under 10 minutes.
Is it like a condominium or a REIT?
The timeshare model offered by these companies is not comparable to the joint ownership of a house or building, as investors do not occupy or use the property. Also, the number of shares sold in a split investment tends to be much higher.
It is also different from a Real Estate Investment Trust (REIT) because instead of investing in the shares of a publicly traded company that owns a set of income generating properties, you are investing in a single property.
How much does it cost and how much can I invest?
Each business has a different approach to participation.
With Addy, the basic membership fee is $ 25 per year and you can buy a share in a property for as little as a dollar. The company caps the maximum amount that a single investor can invest in a single property at $ 1,500.
“We’re not made for the rich, we’re made for the 99 percent of Canadians who want to own real estate,” said Addy CEO and co-founder Mike Stephenson. The company currently has 16,000 members, but not all have invested.
At BuyProperly, the minimum investment is $ 2,500.
“This is where we hit a sweet spot,” said Khushboo Jha, CEO and Founder of BuyProperly. The amount of the investment “isn’t so insignificant that it won’t move the needle for someone, and it’s not so big that you can’t do it.”
The company does not sell subscriptions. Investors share one-time acquisition costs (like home inspection and legal fees) among themselves and have to pay recurring fees for the maintenance and management of the property. BuyProperly also charges them an annual fee of 2.5% plus taxes and GST / HST on the amount of their investment.
The company currently has 300 investors and no investor can own more than 50% of a house. Jha says most of their investors want to spread their money across multiple properties.
How do you make money?
With every business, there are two main ways for investors to make money.
First, they receive a percentage of the rental income compared to their investment.
Then, when a property is sold, the capital gain is returned to investors, who also get back the capital of their investment. BuyProperly also allows investors to sell their stake earlier to another investor if they wish to vacate a property before it is sold by the company.
Jamie Smith, a 35-year-old tenant in Vancouver, invested with Addy because she feels overpriced outside her city.
“If you want, for example, a park bench here, I don’t know if we could afford it,” she said.
She recently invested a total of $ 1,500 in two Addy properties with her partner, and they plan to do more.
She found it rewarding to “pick the building I can put my money in,” adding that fractional ownership was a “good” option for someone who doesn’t have a lot to invest.
“It sounds like a very empowering process,” said Smith, who found while trying to buy a place to live “the exact opposite of it”.
Dangers and disadvantages
Just because real estate in many parts of Canada seems to be only going up in value doesn’t mean fractional ownership is risk free.
“When things are going well, it will be to your advantage. But when the going gets tough, risk is involved, ”said Laleh Samarbakhsh, Associate Professor of Finance at the Ted Rogers School of Management at Ryerson University.
She points out that a property owned by a group of fractional investors can lose value like any other property. She also says real estate isn’t always easy to liquidate, which can force homeowners to wait for a return or accept less money if they have to sell.
She said a concern for the real estate industry as a whole is that as fractional ownership attracts more people, prices could become even more inflated.
Samarbakhsh recognizes that fractional ownership can be exciting and enticing, but cautions that investment decisions should not be based on fear of being left behind.
“You have to be very careful with that,” she said.