Want to buy property but don't have a down payment? 'Fractional ownership' may be the ticket

With home prices in Canada at stratospheric levels and a commercial property something few individuals can afford to buy, two companies are offering Canadians a way to get in on the action.

It's 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's BuyProperly are part of the emerging "fintech" and "proptech" sectors, which are using technology to disrupt the financial and real estate industries. 

Avis Devine, an associate professor of real estate with the Schulich School of Business at York University, said the industry is "ripe for disruption, because we've operated in the same way for so very long."  

She believes fractional ownership could be very appealing to people in Gen Z and younger millennials.

Experts say the fractional ownership concept opens up a new path to participate in real estate by lowering costs — but there are also potential problems.

How does it work? 

The sales pitch on fractional ownership is that even if you don't have a down payment for a house or can't finance a strip mall, with a few mouse clicks to sign up and an electronic fund transfer (EFT) to pay for your investment, you could become part-owner of a property.

Addy and BuyProperly essentially crowdfund a property purchase by attracting investors online. 

The focus for BuyProperly is selling shares in rental houses in Ontario. Addy deals with properties worth $5 million to $50 million, like apartment buildings and industrial parks, with investments in B.C., Alberta and Ontario so far. 

Both offer a small inventory of investment properties on their web sites and say they are looking for more.    

In Australia, India and the U.S., companies are offering different fractional ownership options — for example, one American company sells shares in farmland.

Addy and BuyProperly say they have regulatory approval to sell investments and claim a transaction can be done in less than 10 minutes. 

Is it like co-ownership or a REIT?

The fractional ownership model these companies offer is not like co-ownership of a house or building, because investors do not occupy or use the property. Also, the number of shares sold in a fractional investment tends to be much higher.   

It is also different from a real estate investment trust (REIT) because instead of investing in the stock of a publicly traded company that has a bundle of income-producing properties, you are investing in a single property.   

What does it cost and how much can I invest?

Each company 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 one dollar. The company caps the maximum amount any single investor can put into a single property at $1,500.  

"We're not built for the rich, we're built for the 99 per cent of Canadians who want to own some real estate," said Addy CEO and co-founder Mike Stephenson. The company currently has 16,000 members, but not all of them have made investments.

At BuyProperly, the minimum investment is $2,500. 

"That's where we realized a sweet spot," said Khushboo Jha, CEO and founder of BuyProperly. The investment amount "is not so insignificant it will not move the needle for somebody, and it's not so high that you couldn't make it."

The company doesn't sell memberships. Investors split the one-time acquisition costs (like home inspection and legal fees) among themselves and are charged recurring costs for property maintenance and management. BuyProperly also charges them an annual fee of 2.5 per cent plus tax and GST/HST on their investment amount.

The company has 300 investors to date and no single investor can own more than 50 per cent of a house. Jha says most of their investors want to spread their money out over multiple properties.  

How do you make money?

With each company, there are two main ways investors make money.

First, they receive a percentage of rental income relative to their investment.  

Then, when a property is sold, appreciation is paid back to investors, who also get back their investment principal. BuyProperly also allows investors to sell their stake early to another investor if they want to exit a property before it is sold by the company.

Jamie Smith, a 35-year-old renter in Vancouver, invested with Addy because she feels priced out of her city. 

"If you want, like, a park bench here, I don't know if we could afford it," she said.   

She recently put a total of $1,500 into two Addy properties with her partner, and they plan on doing more.

She found it rewarding to "pick the building I get to put my amount in," adding that fractional ownership was a "nice" option for someone who doesn't have a lot to invest. 

"It feels like a very empowering process," said Smith, who found trying to buy a place to live "the exact opposite of that." 

Dangers and drawbacks 

The fact that real estate in many parts of Canada seems to do nothing but go up in value doesn't mean fractional ownership is risk-free.

"When things are good, it's gonna be to your advantage. But when things are bad, risk is involved," said Laleh Samarbakhsh, an 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 go down in value just like any other property. She also says that real estate is not always easy to liquidate, which can force owners to wait for a return or accept less money if they need to sell.

She said that a worry for the real estate sector at large is that as fractional ownership brings in more people, prices could become even more inflated.

Samarbakhsh acknowledges that fractional ownership can be exciting and attractive, but warns that investment decisions should not be based on a fear of being left behind. 

"You have to be very careful about that," she said.