With median house prices in Sydney crossing the $1 million threshold almost six months ago, it was only a matter of time before Australians embraced the concept of property crowdfunding.

The idea is catching on as investors take advantage of schemes that allow them to own part of a property rather than having to raise the substantial deposit needed to get a conventional toehold on the ladder.

So how does it work? A crowd of investors raises the money for a project or investment, and rental returns and any profits from capital growth once the property is sold are distributed among the stakeholders, much like a syndicate.

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In the past 12 months alone, a handful of companies, such as VentureCrowd and DomaCom, have set up crowdfunding businesses in Australia, and a few weeks ago, the Singapore-based CoAssets formerly announced its intention to expand its reach into Australia. It hopes to offer investors a slice of the shareholder action for as little as $1000.

They join one of the earliest adopters of fractional property investment in Australia, OpenCorp, which began tapping a retail pool of investors to fund projects since 2009.

Opening up the property market

But does crowdfunding offer a solution to those who would otherwise be unable to buy property?

The team behind DomaCom certainly hopes so.

General manager of sales and marketing Warren Gibson said DomaCom wanted to bring the principles of the equity markets to property.

“Diversification is an important principle in investment and you wouldn’t put 100 per cent of your money in one stock so why are people putting it into one property,” Mr Gibson said.

“This way you can buy part of a property just like you buy part of a company.”

DomaCom, which began operating in October last year, requires $2500 for a minimum investment and is set up as an Australian Securities and Investments Commission-registered managed investment scheme.

Financial planners who have completed the DomaCom accreditation scheme put forward investors and DomaCom, in the role of fund managers, handle the purchase of the property. The property is held in trust by Perpetual, and investors can buy “units” within the sub-fund.

DomaCom charges a small 0.8 per cent fund manager fee.

“All of the due diligence about whether it is a good property to buy, the conveyancing, a valuation and so on is organised by us,” Mr Gibson said.

Accessing capital

After five years, the owners vote on whether to sell the property for liquidation, and owners can increase or decrease the percentage of the property they own at any given time by selling their “chunks” to other investors.

“We see this as a way of giving more options to Gen Y who love property and understand it better than the equities market,” Mr Gibson said.

Senior Associate from Adelaide-based NDA Law, Paul Gordon, agreed that crowdfunding projects provide a way for younger people to enter the property market with a much smaller investment.

“This makes it much more accessible than trying to buy your own property straight away,” he said.

And there were fewer upfront problems to worry about, Mr Gordon added.

“Essentially this kind of investment is easy to manage – you just put your money in and returns, if any, are paid into your bank account,” he said.

“You don’t have to worry about as many compliance issues compared to having a rental property, such as tax and dealing with tenants. But you would still have to think about capital gains tax in the event you actually make a profit on your investment.”

Buyer beware

The crowdfunding companies are all structured differently and have different rules and regulations so, as with any investment, it is important to pay attention to the fine print.

Mr Gordon said many of the investments may still have risk attached.

“It’s important that you read the fine print and understand what you have committed to legally and to remember there is no direct ownership of the property, essentially you’re investing in the development fund.

“You usually get shares in the development company or units in a unit trust.”

Mr Gordon said one potential pitfall would be accessing the money quickly if you needed to.

“You’d have to sell your shares or units and the market for that is limited,” he said.