Andrew: Today, I’m talking to Arthur Naoumidis, CEO of DomaCom about their Rent-to-Own Initiative. Arthur, can you explain what Rent-to-Own is in the context of rent-to-buy and build-to-rent which a lot of people will have heard of?
Arthur: Look, the traditional methods of rent-to-buy, firstly, is quite simple. It’s a tenant rents a property from a developer and pays normal rent plus an additional margin which is an option to purchase the property at a certain time in the future, say five years from now. At that time, the tenant has the option of purchasing the property. The whole model works if the property goes up in that time and that way, the increase in property value is the deposit effectively.
Now, clearly there are a couple of risks associated with this, the main one being that if at any point the tenant doesn’t pay the rent, then they lose all the value of the options they’ve paid up until that point. So they get no value until the end, that’s one. The other is that what if the property doesn’t go up? Then they get no value again from the options. So it’s just simply an option to purchase in the future. The build-to-rent is quite a new model so it’s quite a few larger developers are building say 200, 300 apartment blocks and with the sole purpose of renting them forever. And so the key attraction of this model is that, for tenants, they know they have security of tenure. So you’ll be able to keep renting this property at a market rent for as long as you like. And that’s quite attractive, but what it doesn’t do is provide any pathway to ownership. So it’s just creating a permanent class of renters.
Andrew: And rent-to-own?
Arthur: Now, our new offering, the rent-to-own, is very simple. It allows tenants to pay just commercial rent and then, over a 10-year period on the anniversary, receive 1% equity gifted from the developer. And, as you’ll see later, it’s not a charity it’s an attractive business model for the tenant, for the developer and, you’ll see, for the renter as well. So effectively people pay normal commercial rent and they obtain equity in the property over 10 years. So it’s a pathway to ownership.
Andrew: How does the DomaCom rent-to-own model work?
Arthur: Well, it’s quite simple. You know, traditionally, developers, when they’re marketing their products, have to provide, you know, distribution payments. So they pay a certain percentage of their development profits to other people to market their products. So what DomaCom has done is sourced out developers who have excess stock at the moment and basically gone to them and say, “Well, that developer discount or that develop a margin that you pay project marketers, instead can we offer it as a benefit to investors and to tenants?”
So the way it works is very simple. Developers sell the property to DomaCom. And the way we purchase the property is firstly we leverage it using our internal leverage to 50%, so we borrow 50%. I’ll use the example of a million-dollar property. We borrow $500, 000, we also then raise $200, 000 from equity investors, and we give that to the vendor. So they receive $700, 000 cash. We also then deliver 300,000 $1 units in the DomaCom sub-fund. So that way what the developer gets as settlement would be $700,000 cash and 300,000 $1 units.
Now, the key for this product is that that 300,000 $1 units…the developer uses some of that to gift 15% uplift to the investors. That way, if the equity investors purchase $200,000, they get $230,000 worth of value. The other element which is quite key to this, which as far as we can tell unique in our product, is that the developer uses some of the remaining equity that they have to give 1% equity to the tenant for every year. So whoever’s the tenant on the anniversary receives 1% of the equity as units in the DomaCom sub-fund. Tenants acquire equity just by paying normal rent. The product is unique in that it uses the fractional property platform to deliver equity interest to tenants over a 10-year period. We’re not aware of any other product in the world that does this.
Andrew: This model is an Australian first where both tenants and investors benefit, but what is the attraction for developers?
Arthur: There are several attractions for developers. The first is simply it’s another form of distribution. You know, it’s about the same cost as they would normally pay for project marketers. But, in particular, it’s a distribution channel that allows financial planners to distribute properties because DomaCom is a financial product. It provides a way of selling lines of stock at probably about the same amount it would cost them normally and it enables the replacement of the defunct stamp duty savings that used to happen. So effectively it’s a very attractive distribution model for developers.
Andrew: So each property in a line from a single developer is treated as a separate transaction. Does that mean family and friends can acquire one property between them with a member of the family as a tenant?
Arthur: Yes, that’s one of the features of the DomaCom fund is that we create a sub-fund for every specific property. So if a family group, or family and friend group, wish to acquire one of these properties as a group they can. And one of their family members, probably their children, can participate as the tenant.
Andrew: That’s a great strategy for families to help children get into a property. Can investors and tenants use some of their super to acquire units in the property sub-fund?
Arthur: Yes. One of the recent outcomes for DomaCom’s federal court action with regards to the sole purpose test is that, subject to certain conditions being met, people can use their self-managed super funds to invest in properties. And, subsequently, related parties can apply, subject to certain conditions being met.
Andrew: How does this affect the First Home Buyers Grant? And, with a debt component, do young people need to satisfy the lender in any way?
Arthur: Well, one of the key elements of the DomaCom platform is that, you know, it’s a property investment but not a property purchase. One of the key features of our product is that there is no impact to tenants or investors with regards to the first-time buyers grant. And also, the tenants and investors are not borrowers with the loan. The DomaCom fund is the borrower. Therefore, they are not subject to any of the lender serviceability checks. Clearly, tenants will have to be able to service the rent and they are the only checks that are made.
Andrew: There are obvious unique benefits for tenants, but can you summarize the benefits for investors?
Arthur: Well, the first key benefit for investors is that access to developer discounts. So, at the moment, these sort of discounts are only available to institutional investors who go to a developer and acquire, you know, 50 or 60 properties in one go. You can get up to 15% discount access to properties. That’s number one. The other is is that clearly, from a investor perspective, the tenants are going to be lower risk is our belief because they will end up being shareholders in that same property. And thirdly, investors have a natural party to who may want to buy some of the units. In other words, the tenant can over the years acquire further interest in the property by using the DomaCom secondary market to acquire units, buy units from the investors. So it’s a very attractive product for investors as well. And therefore we should expect to have lower vacancy risk.
Andrew: So how do investors exit? And when might that happen?
Arthur: Well, there is two key exit strategies within the DomaCom fund. The first is when we create a sub-fund investors decide whether the sub-fund is for 5 or 10 years. Investors vote to either renew for another period or not and if it’s decided not to renew, we will sell the property and investors will get their share. But also, at any time, investors can use the secondary market to offer their units for sale. Investors get a guaranteed liquidity event at the end of the term of the sub-fund, should they wish it. And subject to there being a willing buyer, the investors may be able to sell some interests to another investor or more likely to the tenant.
Andrew: A lot of care must be taken when buying an investment property. How does DomaCom minimize the risk?
Arthur: Well, DomaCom, as a platform, clearly has to perform due diligence on the assets. And the first layer of due diligence is legal. So we basically employ a conveyancing lawyer to check the title contract of sale. We then do building due diligence. So we do building inspections and pest inspections, if necessary. And then we do external valuations of the property. Now, prior to any properties being listed for the rent-to-own, we also perform in addition an initial filter where we get a external property manager just to do a rental appraisal. If anything is shown as an issue in the in any of these due diligence steps, we don’t proceed with the property.
Andrew: So what fees and charges are there?
Arthur: Like all products, there are fees and charges. The first set of charges are those relating to the due diligence. So they’re passed through directly to investors. So they relate to the conveyancing checks, the legal due diligence costs, the building inspections, pest inspection valuations. In terms of fees, there are fees in relation to the syndication. So there’s platform syndication fee and there is an upfront adviser syndication fee. And then there’s an ongoing funds management fee, which normally for DomaCom is 0.88%, but we’ve reduced it for these products to 0.66% of the value of the property ongoing. So that’s really the some of the general fees.
Andrew: So how do investors participate?
Arthur: Click the apply button on the DomaCom Rent-to-Own page and complete the application process, including read the PDS.