DollarsAndSense - Could Fractional Property Investing be the Solution for The Age-Old Problem of Diversification in Property Investing?

SINGAPORE, Sep. 13 2022 / DollarsAndSense / – Living in Singapore, many of us are likely to harbour the dream of owning an investment property. Climbing property prices today justify this desire. Rents – which are also rising – act as a regular stream of income while holding the investment property.

While becoming a property investor is attractive, there are many barriers that ordinary investors like us will face.

Property Investing Is An Expensive Endeavour

Understandably, the biggest hurdle to property investing in Singapore is that it is prohibitively expensive. In the current economic climate, private home prices, which are at record highs, show no signs of slowing down.

If we are investing in our first residential property, we will have to put down at least 25% of the purchase price for the down payment. This is in addition to the transaction costs like agent commissions, stamp duty, legal costs, and other miscellaneous costs.

If we intend to purchase our second property in Singapore, we also have to fork out the Additional Buyer’s Stamp Duty (ABSD) of 17% (for Singapore Citizens) of the purchase price, which has to be paid in cash.

More likely than not, we may also need another home loan, to finance our second property. However, due to the Loan-To-Value (LTV) limit of 45% for the second property and the Total Debt Servicing Ratio (TDSR) cap of 55% of our monthly income, we are unlikely to be able to take a large loan. This could make it hard for many to realise their dreams of owning multiple properties in Singapore.

To get around these restrictions and costs, some may look to invest in overseas properties, as they typically have either a lower price or offer a larger loan size. Even then, the investment is likely to cost hundreds of thousands of dollars.

Information Asymmetry In The Property Market

The property market is very different from the stock market. In the stock market, when we buy one share of a company, it is a homogeneous investment. For example, your shareholding in DBS Bank Limited is identical to any other DBS share. In the property market, no two properties are the same. It’s safe to say that even two properties of the same size, in the same development, and on the same floor can have greatly contrasting values. Anything could matter in property investing, which makes information so much more critical.

It is also logical that the current property owner or the marketing agent will always have more intimate knowledge about the property we want to buy, compared to us.

Administrative Work (And Costs)

When looking for a property to invest in, we usually engage a real estate agent to pre-select some properties for viewing. If we’re interested in the property, we could go for multiple viewings – and why not? We are going to pay a very high six-figure or even seven-figure sum for it.

There’s also a lot of time that we may need to spend on other administrative work, such as preparing our documentation for the down payment (few have several hundred thousand dollars lying around), understanding the bank loan terms, and working with a lawyer to complete the buying process.

Managing The Investment Property

Buying the property is only half the battle. We still need to maintain the property and rent it out, if we want to collect a rental income from it. Thus, we need to make sure that our property is in good condition. Depending on the condition we bought it in, we may have to spruce it up or renovate it. There’s also the possibility of having to purchase furniture in order to rent it out.

When we engage an agent to rent out our property, we have to pay the agent’s fees – usually one month’s rent for every two-year rental period. If we are unable to rent the property out at any juncture, we still have to continue servicing the home loan. Worse still, as we’ve seen this year, home loan rates can also spike – from about 1+% in the past few years to nearly 3% today. This can result in a substantial increase if we’re locked into a floating-rate home loan package. Even on fixed-rate home loans, it may be a matter of time before our home loans increase.

Needless to say, each aspect of these problems in property investing will be magnified if we are investing overseas. There will also be other concerns, such as understanding the legal and tax requirements, being on the ground to understand the market and get a good deal, managing currency risk and more.

We Still Haven’t Solved The “Age-Old” Problem Of Diversification

Even if we overcome the transactional challenges of buying a property and becoming a landlord, we still have not answered the big problem, as alluded to in our article title, of diversification.

Most property investors will only ever own just a handful (or less) of investment properties because of high property prices. Our exposure to the property market will likely be just one or two properties.

Even for overseas property investors, the problem isn’t any smaller because of a potentially lower price. In all likelihood, we will only invest in property markets that we are familiar with – limiting how many countries, and even cities within the countries, we are willing to invest in.

The other big problem with diversification is that most of us simply do not have access to different types of properties. The most common properties we will invest in are either residential, strata-titled commercial, or strata-titled industrial properties. Our property investment exposure will be limited to certain types of properties.

How Investing In A Fraction Of A Property Can Help Investors

Physical real estate investments have been around for a very long time. However, due to the high entry barriers, some of which are explained above, it can be challenging for ordinary retail investors to gain meaningful access to the asset class.

By investing in a fraction of a property, we own a small percentage of the underlying physical property investments. This makes it much more affordable to gain exposure to property investments and diversify our overall portfolio across multiple real estate investments. The management of such property investments is also left to the professionals.

REITs investing does offer a similar solution, breaking down our investment size and offering professional property management. But the main drawback is that REITs tend to move alongside the equity markets, based on market sentiments. This is unlike direct property investments, which is a proven asset class for wealth preservation, inflation hedging, and returns generation.

Now, Singapore investors can invest in physical real estate through RealVantage, a private equity real estate co-investment platform.

Be A Confident (Fractional) Property Investor

RealVantage is a property fintech firm in Singapore that is regulated by the Monetary Authority of Singapore (MAS) and holds a capital markets services licence (CMS Licence 101156).

Through its online real estate co-investment platform, RealVantage offers access to physical property investments that were previously only offered to institutional investors. As a non-institutional property investor, such an opportunity would never have been available to us before.

RealVantage offers us diversification in the geography, property sector or type, and development life cycle of the real estate project in the deals it brings to the table. If we choose to invest in an opportunity, we can start with as little as $5,000 to $25,000 per investment. This minimum investment amount would differ in quantum and currency denominations, depending on the property investment opportunity.

Since it commenced operations in 2019, RealVantage has funded 34 deals and successfully realised 10 deals with an average IRR of 27.4% for equity deals and an average income distribution of 7.9% for income-producing deals (based on past performance of its respective properties). And all ongoing deals have zero defaults. Below is a snippet of some of the past deals that investors could invest in via its platform.

Source: Screenshots from RealVantage

These are deals that we would not normally have access to. As we can see, the investments are also geographically diversified across Singapore, Australia and the U.K., and they also offer opportunities in the U.S. and Hong Kong markets.

In general, we can invest in RealVantage’s Core, Value-Add, or Opportunistic real estate investments. Core typically provides stable cash flows; Opportunistic investments tend to see higher potential capital appreciation; while Value-Add lies in between the two strategies.

RealVantage doesn’t just provide access to real estate investment opportunities. It also does the heavy lifting for you – from originating and analysing the deals to conducting thorough due diligence. The analysts at RealVantage also create a tax-optimised investment structure to minimise tax leakages as well as provide regular updates on the deals, so we understand what’s happening with our investments.

For every deal that comes on the table, there may be as many as 10 deals that are turned away. And RealVantage invests in every deal it brings to the table for retail investors like us. In fact, many of the team members we spoke to invested on a personal level as well.

The team has a strong expertise in the real estate and fintech industry – explaining exactly why they were able to come up with the RealVantage investment solution. In addition, they have a panel of industry experts who form the investment committee. Only deals that are approved by the investment committee are shown on the platform. These experts are highly experienced and come from diverse backgrounds within the real estate industry.

It takes just a few minutes to create an account with RealVantage. Once set up, we can start browsing the investment opportunities currently on offer. If we like one, we can start investing, or we could choose to wait for the next opportunity too. If you’re not quite sure, one strategy we think is sensible is simply to enjoy the benefits of diversification – and invest in most of the investment opportunities on the table.

With an online account, we will also be able to view our personalised investment dashboard, which shows your investment portfolio, distributions, statements, and regular property updates.

Source: Screenshot of RealVantage Dashboard for investors

(figures are for reference only – i.e. not my own returns even if I wish it were!)

To get started in real estate co-investing, you can review the investment opportunities available and open an account with RealVantage.

About RealVantage

RealVantage is a leading real estate co-investment platform, licensed and regulated by the Monetary Authority of Singapore (MAS), that allows our investors to diversify across markets, overseas properties, sectors and investment strategies.

The team at RealVantage are highly qualified professionals who brings about a multi-disciplinary vision and approach in their respective fields towards business development, management, and client satisfaction. The team is led by distinguished Board of Advisors and advisory committee who provide cross-functional and multi-disciplinary expertise to the RealVantage team ranging from real estate, corporate finance, technology, venture capital, and startups growth. The team's philosophy, core values, and technological edge help clients build a diversified and high-performing real estate investment portfolio.

Get in touch with RealVantage today to see how they can help you in your real estate investment journey.

Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.