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Many millennials struggle to save enough to fund their first home deposit. With prices rising rapidly, and unaffordability in the news every week, it’s easy to feel demoralised.
Savings account interest rates are stupidly low, leading many savers to search for a better return. Savers want to help their savings keep pace with the property market.
Investing in ETFs is tempting, but assuming most have less than 7 years before their planned home purchase, likely too risky. A market crash could decimate your home deposit savings, and take years to recover.
What is Brick x
Brick X is an online managed fund. The platform offers fractional residential property investments. I note they have recently branched out into commercial property.
Brick X purchased its first property in 2015. This Australian company purchase properties within a trust with or without borrowings. They then divide the properties into 10,000 virtual bricks, available for purchase by investors.
Brick X organise the property management, tenant screening, rent collection and deal with any real estate dramas. They pay investors distributions based on rent minus expenses, but the main draw of the platform is to invest for capital growth in the property value.
The idea is that want to be homeowners (and investors) can invest their savings in Brick X, so that their savings can keep pace with the property market.
How Does it Work?
Investors can start with $250. Brick X clients can choose a property from those available on the platform, or opt to direct debit a regular investment and let Brick X allocate their investment money.
The platform has a low barrier to entry, particularly in comparison with buying direct property. The ability to automate investing is a useful feature in helping investors stick to their own plan.
I have looked into the platform several times over the past 3 years. Initially trying to save a deposit for our 1st investment property, the Brick X concept seemed appealing.
What are the Brick X Fees?
Investing through this platform is, as expected, more expensive than investing in property directly. But is it worth it? Fees according to the 97 page PDS:
A signup fee of $10 taken from your initial minimum $250 investment
0.5% transaction fee on any purchase and sale of bricks. If wanting to direct debit small amounts into the platform each pay, this fee eats into returns. Investing less often would obviously create fewer transaction fees.
The Brick X transaction fee is comparable with brokerage fees. With Commsec Pocket, you will pay $2 for a $1000 trade, or 0.02%. If you can invest larger amounts less regularly, brokerage can be found far cheaper.
Brick X employ property managers and charge a 6% per annum property management fee. This seems very reasonable, from my experience with property managers so far.
On purchase, the usual acquisition costs include stamp duty, solicitors fees and a cash reserve for unexpected expenses is calculated. A cash reserve consisting of 3 months of expenses, along with all other acquisition costs is added to the purchase price when setting brick prices. These costs are amortised over 5 years.
Brick X orders an independent valuation of each property annually, which incurs another small fee and updates the price of individual bricks.
But this is the killer. Brick X can claim a management fee of Up to 2% of the gross asset value per year. Thanks to Michelle, I note this fee is variable, and often far less. You need to read the individual additional disclosure statement attached to each property to work out what the management fee is.
My super fees are ~0.7% and ETF fees are usually less than 0.5%.
Unless you have been living under a rock for the past 10 years, you will have seen an industry superannuation advert, and understand the significance of a 1% increase in fees compounded over decades.
The return on your investment needs to compensate for this management fee plus transaction fees.
But Brick X can also reward themselves with a bonus if the asset outperforms their prediction. They can take a performance fee of 30% of any outperformance in addition to all the fees above. This is also disclosed in the individual property disclosure statement, and is also variable according to the property.
What are the Risks?
Property Market Risks
By investing in property, you are taking on all the usual risks of the property market. Property prices can and do go down as well as up. Some take years (or even decades) to recover.
Interest rate risk exists, albeit to a lesser extent with Brick X because most of the properties have lower loan to value ratios than most individual investors would start with.
Tenant risks also exist. The professionally managed properties should have robust tenant screening. Of course, this is not 100% effective, but Brick X investors also have no power over assessing the competence and diligence of their property manager.
Expensive repairs and vacancies also occur at no fault of a tenant.
But with Brick X you also have an additional risk, that of the company itself. If Brick X goes bust, they turn the properties over to an alternative manager who will sell the real estate and return funds to investors. I wouldn’t like to guess how long that might take.
What are the Returns?
Capital Growth Performance
Brick X investors are trusting in Brick X to choose suitable properties for investing. The platform provides historical suburb capital growth and predicted rental income. Of course nothing in investing is guaranteed.
Brick X’s historic performance is not that easy to find. The company produce reports every 6 months comparing performance with Corelogic’s home value index.
In the six months leading up to June 2020, Brick X underperformed the index representing the entire Australian property market.
In the six months leading up to June 2019, Brick X outperformed Corelogics home value index. June 2018’s report also shows Brick X outperforming.
I couldn’t find the data I really wanted – Brick X’s performance since its 1st property purchase in 2015.
I would expect properties purchased by professionals for investment to consistently outperform a home value index representing all Australian homes. It is unclear from the reports I can find whether the report to June 2020 was just a blip.
Brick X may Dilute Investors Holdings in Property Price Falls
If a property value drops significantly, so that is worth less than the valuation of 10,000 bricks, Brick X state they may release extra bricks to fund the shortfall, effectively devaluing current investors holdings.
Net rental returns have historically been around 2% or less. As regular readers will understand, I am a fan of focusing on capital growth more than yield. I prefer gains to be in capital growth, to compound tax free for years before I will need retirement income.
I do note some higher rental yield properties on the platform now, offering 5-6% net rental yield. They appear completely different types of property than the initial investments, suggesting a change in investing philosophy by Brick X.
Historic returns plus expected net rental returns advertised are 12-13%, which seem almost too good to be true. It will be interesting to check in again in another 3 years to find out what the actual performance was.
An Example of a Property I have been Following.
Brick X purchased this cute 2 bed in Ballarat in August 2018. I was almost tempted to invest in this property 3 years ago.
Ballarat has been an area of interest for property investors, and I liked the look of the property when I first looked (not an amazing investment thesis!).
The purchase Price 3 years ago was $401,000.
Brick X incurred $44,021 in acquisition costs, including stamp duty, solicitors and bank fees
A cash reserve of $5,279 was set in case of unexpected expenses.
The property was conservatively leveraged with a loan to value ratio of 30%. A 5-year interest-only loan was fixed at 3.79%, after which the loan will revert to principal and interest repayments.
Each brick was priced initially at $33.
An independent valuation in June 2021, almost 3 years after purchase came in at $450,000. That’s around a 12.2% return in 2 years and 10 months of ownership.
But the current brick value is $35.69, representing only an 8.15% total return over 2 years and 10 months. Not terrible, but certainly nowhere near Brick X’s advertised historic annual capital growth of 8.17%.
Net rental income is just 1.23% annualised or around 4 cents per month currently.
Perhaps it seems a little unfair to analyse this single property based on just under three years valuations. But this was the property I would have invested in 3 years ago if I had decided to go for it.
A three year period also represents a fairly likely scenario for a first time home buyer investing their savings intended for a home deposit.
The lack of liquidity seems to be the major complaint of Brick X investors. You cannot simply sell your bricks back to the platform for their current valuation. Most of the time, this seems to happen in around 3 days currently.
To sell your bricks, you need a buyer. And you need to agree on price. This means sellers may offer less than the official brick valuation.
In the event that Brick X had some major negative publicity, fewer investors may wish to invest in Brick X. If Brick X were in serious (and public) financial difficulty, investors may find their bricks unsellable. They would then be waiting for the property to be sold in order to recoup their investments, similar to direct property investment.
One positive of investing in bricks rather than direct property investment is the ability to diversify a relatively small amount of money among several properties.
Direct property investment is an extremely “lumpy” investment, resulting in a large amount of investors net worth being tied up in a single asset. This makes asset selection (and in my opinion professional assistance) paramount. But even professional help does not guarantee results.
By spreading your investment over several properties you can hedge your bets, and spread the risk. If one property ends up vacant for six months, all is not lost as your other properties continue to perform. However, having your investment spread across a handful of properties with BrickX, all exposed to the business risk of Brick X is not nearly as diversified as purchasing shares in a real estate investment trust, or in broad-based index ETFs.
My Brick X Conclusions
Fractional property investing is a nice idea. Unfortunately, the fees and liquidity risk make Brick X less appealing, and certainly more complicated than other options.
I was curious and tempted to invest in Brick X in 2018 whilst saving a deposit for our first investment property. It seemed to be taking forever (it always does!).
However, I couldn’t get over my doubts concerning liquidity and risk.
Instead, I worked a lot of locum shifts and eventually pulled that deposit together in my mortgage offset account.
You never really know how an investment will turn out until you have been invested for a few years, but I don’t feel like I missed out on much with Brick X.
Those wanting to save for a property deposit should consider the First home super saver scheme, as potential tax savings can augment your deposit savings. Consider the pros and cons and alternatives on my article on saving that first home deposit.
Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.