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Friday, 5 May 2017

Brickx: The Real Estate Investment Trap

So you're scared that you'll never buy a home? According to domain.com 20% of people will retire with a mortgage debt, and many millennials have 'given up' on ever owning a home.

To fill this void, a new company called 'Brickx' has started up. For less than $100 you can buy a single share of a rental property (known as a Brick) and get your first step on the property ladder.

I have so many problems with this product, I have decided to devote a whole post to it.

There will be no links, affiliate or others, to Brickx in this post. They get enough marketing as is, you'll be able to find them on Google. I am not recommending the product, so I won't link to it, but I do want to talk about it.

The basic concept

Real Estate Investment Trusts and Real Estate Funds are not a new concept. They come in a variety of flavours focusing on residential real estate, commercial real estate, mortgages and a mix of the three. A quick google search returns a list of 47 publicly listed REITs in Australia, this is just the first result. REITs can be traded just like shares, are incredibly liquid, and offer diversification by allowing you access to the growth and income of a variety of properties.

Brickx is different because you don't buy into an intangible trust or fund. When buying through Brickx you buy a share of a single property. Their marketing strategy aims at allowing people who cannot afford a home to 'buy' real estate. As an owner of a Brick you are entitled to a portion of the rents. And we can assume you are also responsible for the maintenance costs, which will eventuate as reduced rents.

The draw card of Brickx is that by banding with others who cannot afford a property you can get together and buy an investment. Clearly the people behind this business have never lived in a shared home if they think a group of strangers sharing responsibility for property is going to end well. Shared accountability is equal to no accountability.

Pros: Home 'ownership', rental income, a (potentially) growing asset, hands-off management

While it's clear from my introduction I have issues with Brickx, it wouldn't be a fair review without looking at the positives. Brickx allows people who cannot afford a home (yet) to invest in property. It returns the rent to the investor, claiming returns of greater than 3% (barely better than my bank account).

On top of the rent return, investors can make money by the growth of the property and given the spike in prices in Sydney this could be quite lucrative.

Brickx also manages the property for you, so once you have bought in it's a completely hands off process.

Cons: Ridiculous buy in fees, sod all diversification, hands-off management, no leveraging

Okay, and we're done being nice. Let's start with the buy in fees, because they are downright appalling. Firstly, before you even start you need to deposit $75, $10 of which is instantly lost to application fees. 13% of your investment is up in smoke before you even start. That in itself makes me want to wave my middle finger at them. Would you like to know what I paid to set up my RateSetter account? Nothing. And in April they awarded me and my readers almost $500 in sign-up bonuses.

Next is the ongoing fees. Brickx charged 1.75% for every transaction. Which looks something like this...

Purchase a brick:
Brick Value: $98.25
Fees: $1.75
Cost: $100

Brick goes up in value 1%, plus 3% rents
Brick Value: $99.74
Rental income: $2.95
Fees to sell Brick: $1.74
Return on Investment: $1.22 / 1.22%

Or for a better scenario

Brick goes up in value 2%, plus 4% rents
Brick Value: $100.22
Rental income: $3.93
Fees to sell Brick: $1.76
Return on Investment: $2.39 / 2.39%

In both cases your money would have been better sitting untouched in a bank account. That is the sign of a poorly performing investment!

Next though, is what appalls me the most in risk factors. Buying a Real Estate Investment Trust you are exposed to hundreds, if not thousands of properties. A Brick is a share in one property. If that property booms, it will be amazing for you. If that property busts, or just plain doesn't move, it will be devastating. In my above example with 2% capital growth and 4% rents (this assumes you didn't spend anything on maintenance) you made a measly 2.4% return. With zero capital growth, if you wanted to sell after a year you would would make a measly 47cents, or 0.47%. Factor in inflation and you have gone backwards.

Because Brickx handles the property day-to-day and picked the property from the start, you have no input, specifically "Brick Holders do not take an active part in managing the properties and will not be consulted for any day-to-day decisions relating to any property." As a property owner and investor this terrifies me. I have a property manager who has permission to spent up to a weeks rent on repairs. I scrutinize every piece of paperwork she sends me. Every invoice is double checked, and when work needs to be repeated I make the original workmen come back and fix it at a lower cost. Many property managers are overworked and underpaid and managing a very important investment, if you are hands off you have no way of knowing if they do a good job.

And lastly but most importantly, leveraging. Share market returns were 11.9% per annum leading up the GFC, and the current US market is double the price before the crash in 2006. Real estate in Australia is spruiked with returns ranging from 4% - 6% (and Brickx offers less). So if shares are double the return, why Real Estate? Because you can use other peoples money.

Say you put down $30,000 cash as a deposit for a $300,000 property and borrow $270,000. If that property then goes up 4%, while you are paying 4% on the loan, you spend $10,800 on interest, and obtain $12,000 in value. Your $30,000 deposit has grown by $1,200 (capital gains, minus interest).

You also probably received rent around 3% or $170p/week - leading to another $9,000 in your pocket. After fees you probably keep $8,400 (80%) which is equivalent to you $30,000 growing 28% in one year.

Obviously that is a perfect scenario, but the point is in leveraging you can use other peoples money to grow yours much faster. It also increases your risk, which is a discussion for another day. The long-winded point here is that I highly doubt you are going to find a bank willing to lend you money to buy Brickx, which removes the number one money making element behind property.

Brickx - Stud or Dud?

If you couldn't tell by now, absolute dud. I wouldn't touch them with a ten-foot pole. If you want to invest in real estate, can't afford a property and are comfortable with a shared ownership style, try a Real Estate Investment Fund. I purchased $3,000 worth of the Vanguard Australian Properties fund in April two years ago and have seen a 9.5%p/a return after fees.

So why is Brickx getting so much air time, and if they suck why am I reviewing them? Because I am flat out furious at their marketing scheme. I have seen articles, news stories and testimonials from people who were afraid they could never purchase property and are pleased to have found a way they can get on the property ladder. This is absolute bollocks. You do not own property, you have bought into a Real Estate investment with crazy high fees, a nice website and a good marketing scheme. Brickx has preyed on peoples fears that they will never be able to afford their home, and supplied a product that may very well push their investments backwards.

Beware the car salesman with the friendly grin, he works on commission and your high fees are his bread and butter.

12 comments:

  1. Good job calling out the high fees and the fact that it just mainly panders to the people suffering from f.o.m.o.
    It's a good business idea, not a good investment!

    ReplyDelete
    Replies
    1. Fomo is the right word! Brilliant as a business and marketing scheme, but so sneaky and underhanded :(

      Delete
  2. Good call on this. I saw an story on this company on the news the other day (try convincing me that the TV news companies don't get paid for these stories) and so did some more research on them.

    I totally agree with everything you've written about how this is a BAD investment choice.

    FFS, you get more say in the running of Apple by buying a share or two than you do in this investment.

    And what if the company goes bust? Can you image trying to reconcile with the number of brick-holders in each property?

    Naaaa, stay away from this one of the best advice I think.

    ReplyDelete
    Replies
    1. Oh man I don't want to think about the company falling over. Or even if your property went south - where would the money come from if a dodgy tenant gutted the place and it needed a few grand to refurbish? Madness

      Delete
  3. This is really helpful, thanks for writing this! Appreciate the straight talking. A 3% return is not really that impressive is it. You may as well open a high interest savings account with zero fees, like an ING saver :)

    ReplyDelete
    Replies
    1. Absolutely! I have an ING account and I love them. Plus they're backed by the Aus Government guarantee that if they fold your money doesn't fold with them.

      Delete
  4. Urgh, I bought into the scheme back in Jan this year. Albeit, I've only put $350 into it.

    The worst part of it is that they give you a false ROI calculation as it doesn't include the fees that you've paid or the ones you'd incur if you were to sell at the current going rate.

    For example with one of the 3 property bricks I purchased, taking into account the capitol gains ($10) and the "rent" I've received ($0.70), a reported ROI ~11% HOWEVER if we factor the fees involved with both purchasing and selling the bricks (approx $2.80 total) it becomes a much lower actual ROI. Now I understand that they're trying to push it as a long-term strategy (5 years per house) where there may be decently realised gains, but on a per-annum rate it's not looking great.

    ReplyDelete
    Replies
    1. I stumbled across a review the other day (that I know can't find! bah!) that stepped through it over a 5-10 year basis and the return seemed okay.

      BUT - it still misses out on leveraging (which is the most important part of property) and has lower returns than the share market.

      Are you looking at selling that $350 of Brickx, or are you going to stick it out?

      Delete
    2. I'll stick with it for a couple more years, not putting any more money into it. Considering the rate of return and the "dividends" I should be able to cover the fees, but I feel it will be a net $0 process.

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    3. Damn, net zero is not what anyone wants from an investment. Hopefully the property price spikes wildly so you see something good out of it.

      Delete
  5. People may also invest in such devices in order to get loans and securities which are backed by these REITs and mortgagesWe Buy Houses

    ReplyDelete
    Replies
    1. Do you want to expand on that thought Jade? I'm not sure what you mean

      Delete

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