General Manager of Sales and Marketing for fractional investment platform DomaCom, Warren Gibson will unpack his journey from one chicken per week, to working in film and theatre, to getting started in business development.
You’ll find out how you can use crowdfunding to get into the market and benefit from spreading your risk, with only $50,000 per investment. You’ll discover how to gain more control over your property investments via this method, while also gaining insight from Gibson on how it’s never too late to change direction in your career.
With over 35 years of experience in financial services, Gibson’s passion lies in creating new opportunities for clients to get into the property market.
I'm the General Manager of Sales and Marketing for DomaCom. DomaCom was created about five years ago as a means to solving the property investing problem; that problem at the time was and still is and probably is getting increasingly worse, as the high cost of property precludes many people from acquiring it, either as an investment or - even these days - to live in. So the idea of DomaCom was to introduce some of the equity market concepts into the property market inequities. If you want to invest in BHP, or you want to invest in Westfield, or Coles, Myer or any of the listed companies, you buy some shares, you go online and you do that. You don't buy the whole company, you just buy a few shares and if you're a smart investor you won't buy all and put all of your money into the same stock. You stick it into different stocks in different market sectors and that's called diversification. That's the number one rule for minimizing risk.
But with the property it's an all or nothing proposition: you either buy a whole property or you buy nothing at all and for most people, it requires borrowing money to do so. We thought if we could break down the property transaction into bite-sized pieces, it would enable more people to invest in property without having to go into debt and without the need to acquire the entire property. And in doing that, they can actually acquire bits of many different properties in different geographic locations and different types of property - a little bit in commercial and residential and rural and a whole host of other alternative property asset classes.
Since DomaCom launched five years ago, the demand for these asset classes are growing.
It took probably two and a half years for us to build the technology platform and to get the necessary licences and the realisation that we need to make this work. Then it was time to launch and go to market. We began that process through intermediaries, financial planners, financial advisors and we're now expanding more to the retail market. We called this initially fractional property investing which we still do, but we also refer to it as crowdfunding.
That's a term that seems to resonate very well with people and basically it's nothing new. I mean it's been around for centuries, crowdfunding, but it's a modern form of syndication so it just brings a lot of people together to acquire an asset. And you don't need to know each other - you could be family, you could be friends clubbing together or you could be total strangers and you don't need to know who the other investors are. You just choose the asset that you want to invest in and how much you want to invest in it, then you share in a proportion of the rental income and the future capital growth of the asset.
So what’s the difference between this service and a property trust?
The residential investment trusts those are listed on the Stock Exchange, so their fortunes tend to fluctuate with the movement in the share market. In addition to that, really the underlying properties are commercial properties in unlisted property trusts; the underlying property assets are also commercial but they're a pooled structure. So you're going into a fund with quite literally thousands of other people in quite large pooled structures and you have no control over the assets, or have any choice in the assets that are required by the fund manager. In our structure, you get to choose the properties that appeal to you in the areas that appeal to you. And everybody has an opinion on the property, on geographic locations and property types and so on. So you get choice.
In any given day, Gibson spreads awareness about crowdfunding to clients.
Our days are pretty full because we get a lot of projects brought to us. Assets are not an issue, our fund can buy any property for sale anywhere in Australia. Probably the bigger issue is getting awareness and having investors understand how crowdfunding works and what the benefits are. So we spend a fair bit of time explaining that to people but we're also vetting projects on a daily basis. We have people bring us all sorts of interesting things - just to give you an example, right now we're crowdfunding a bio hub in northern NSW. This is the first of 100 green, renewable energy plants. This capital raise is $4.3 million, we anticipate it will pay a yield of around 8%, probably a capital uplift up to maybe 20%. So that's one of them.
Sometimes we look at rural properties, agricultural properties, farmland, generally Australia has performed very well over the last 20 odd years. So if we acquire a farm and we have a tenant there, we're looking at somewhere between 4-5% income yield, a rental yield plus capital growth. The capital growth varies around the country, but on average around 6-7%.
And there is almost an unlimited supply of properties to choose from.
Investors investing in crowdfunding, gradually they're coming around to understanding how it works and that it's a good alternative to investing in property. And a good way to allocate their investment in a property through financial advisors, typically apply an asset allocation strategy based on the risk-return model or profile of their clients. People will put X amount into equities, some into cash, into fixed interest, some into the property. If you're looking to put in a specific asset allocation to property, let's say you're looking at 25% of your portfolio of your self-managed super fund going into property. Even if it's a $1 million self-managed fund, that's $250,000 - you're going to struggle to buy property for $250,000.
But if you use a fractional fund, you could perhaps put $50,000 into each of five different properties, different types of property, different geographic locations. So to help in that process, we have had a number of projects and we take on a range of projects just to give people some alternative options there. We also are using Moody's Analytics to analyse property data from Core Logic to identify the top residential areas in each of the capital cities. So if you have a preference for Brisbane over Sydney or Melbourne, you can invest in the top suburb or the top three areas in Brisbane.
Diving into Gibson’s background now, where did it all start?
I went to school in Melbourne at Peninsula School in Mt Eliza. I grew up in Melbourne, but I've lived in Sydney and Adelaide over the years. So I've owned property in Adelaide and property in Melbourne.
And I was much younger. So it eluded me as much as it's eluding many people today.
How did you end up back in Melbourne? Because he obviously you know grew up in Sydney as well.
My career in financial services spans about 35 years. It started in South Australia, not in Sydney, and I was doing other things in Sydney working in film distribution and theatre. I was just about as diverse as you can get from the investment. My interest in investment started in South Australia and just expanded out from there.
Fresh from school, his journey initially led him into a different industry than he intended.
My preference was to go into stockbroking and I just ended up working in the theatre. So I worked in various arts councils in various festivals, travelled around Australia quite extensively, worked with overseas groups and then moved into film distribution from there. And that just happened to be a time when I think the video industry started to knock cinema distribution and cinema audiences around and the exhibitors withdrew a little from the industry.
So I found myself out of work and I went along to see a financial adviser and he said, ‘What are you doing?’ I told him I wasn't doing anything, but I had some money to invest. He said, ‘Why don't you become an adviser?’ I said I don't know anything about that; but I took some time off and studied, became an adviser. I wasn’t an adviser for that long, I preferred the actual business development side of things, so I moved across to that and that's where I've been for about 30 years.
It's just really interesting that you started off in the film and production and video side of things and ended up in the financial sector, now obviously in business development - so it is a 360 change!
It's very different but I was only a young guy and wasn't quite sure what I wanted to do. I travelled around Europe and went to the theatre in London quite a bit and it was sort of something that interested me and still does. But in terms of a career, it just didn't seem that fulfilling after a while. Or then you start to turn your attention to how do I make some serious money?
The influence to get into the property market stemmed from the great Australian dream of owning his own home.
I was brought up through the late 50s and 60s during a period of what they called the credit squeeze and you know, money was tight. And we're talking I guess post-war in the 50s aren't we? Money was tight and if you had a roast chicken once a week, you were considered middle class or better, it wasn't something you ate a lot. Today people eat chicken every day of the week.
Things were a lot different then and the great Australian dream of owning your own home was of paramount importance. So that's been instilled in my generation quite a bit and you'll see now, baby boomers are the ones that own so much of the property and that's how they've been brought up. It's huge and that's how true wealth is created. It's a defensive asset and whilst people talk about property bubbles burst and all that sort of stuff, in my lifetime I haven't seen that happen. Sometimes a plateau but generally speaking property goes up. I've only got to look at all the houses that I've owned over the years to see where they're at now.
For Gibson, becoming a property investor was as simple as wanting to create wealth for himself and his family.
I bought land, then a house, then another one and sometimes I've sold them. But it came about in exactly the same way, that that was the major way to create wealth in my generation and my parents.
They say you should buy and never sell but I mean that's not always possible when you're raising a family and educating children and what have you. I've had a couple of business interests of my own and that always takes money - and DomaCom’s no different. And in our previous company we mortgaged our homes and invested heavily into business, so it hasn't always been a case of buy and hold.
Focusing on investing purely in independent housing, not everything has worked out as well as he’d hoped.
I've never bought apartments and flats, I've just only ever bought houses. Some have been in the country in rural areas as well [as Melbourne]. Some of them seemed like a good idea at the time. But I must say not all of them have worked out all that well, but most have.
An example of one of Gibson’s less successful investments into property taught him to always gauge the fundamentals.
If you're looking for an investment property, you need to look at the fundamentals. I guess it's like buying shares, you look at the fundamentals - is this a strong company? What does it’s balance sheet look like? Is it in a strong industry? How's it faring? Looking at the property now is this in a growth area or is that growth already gone? Will this be a property that I can rent out? Will it have a low vacancy rate? Like hopefully a zero vacancy rate. Not, ‘I don't like the colour of the walls so I'm not going to buy it,’ because that's irrelevant, your personal tastes are irrelevant. It's not something you are going to live in so you've got to divorce yourself from that and be much more objective around that. And I haven't always been like that. You extend yourself because you want that property, you like that property and maybe that's not always a good thing to do.
In terms of lucrative ventures into property, a recent a-ha moment stood out for Gibson relating to setting himself up for retirement.
Probably my most recent, which is currently rented but it's also something that I'm going to live in at some point in retirement. So that was a question of, ‘What do I do with it?’ And so we renovated that and it has a tenant. We'll end up moving into it, so it's going to satisfy both.
It's just that at first, I thought it would be a great place to to live in and that was really the guiding thing for me. It was on a personal level and realised you know, ‘I can probably rent it out.’ It's reasonably old, probably 40-50 years old down in the Mornington Peninsula. Nice view, nice location. Just thought it would be a nice place to have.
[So that was] probably three years ago. Nothing since then, because my focus is really around DomaCom and helping build this business.
Property Investment in Australia with Just $2,500 - Warren Gibson Shows You How
So was anything holding Gibson back from initially investing into property?
I guess finance is always an issue when you're educating children, paying off a mortgage, investing into business and the business is necessary to generate your income. So I guess that's the main thing for everybody.
And the time period between investing into a business and getting returns from it varies.
It's still an ongoing story. In the last one, it was over a 10 year period so we did well out of that one. This is a different period and it's still building.
The previous business was portfolio administration, which started around 2000 as a solution for financial advisers and accountants to administer their client portfolios. Then DomaCom was born.
The idea for DomaCom came about partly as a result of being engaged in that business and it wasn't my idea, it was our CEO’s idea and he was the CEO of that other particular company as well, so we've worked together for a long time. One of the things that we noticed is we had about 18,000 self-managed super funds that we did the administration work for and 90% of them had no property in their super fund at all, while 10% of them had nothing but property. And that harks back to my earlier point around the problem with the property, is it's an all or nothing proposition. So most self-managed super funds, the average or median balance of self-managed super funds in Australia is about $600,000.
So if you're going to invest 20%, what are you going to buy $120,000 - you're not. If you've got a self-managed super fund, you have to set up a bear trust and there are all kinds of things and you've got to borrow the money. All that does is increase your exposure to that particular asset, so you've got single asset risk exposure, you've got debt exposure, tenancy exposure and most people obviously don't want to do that, otherwise they would have. But 90% of these 18,000 funds - and I think that's a fair sample that you can apply across the other you know 600,000 funds or whatever - is a reasonable sample and the conclusion that you draw is that most of these aren't going to have property investments, because they can't afford to buy a property - they don’t have enough money. And that was the kind of a-ha moment, if you like, in that last business that drew to the solution which is DomaCom. To enable people to buy 10% of a property instead of 100% and have other people buy up the other 90%.
Although he didn’t condition his mindset through any specific resources or mentors, Gibson’s experience has taught him to be wary of spruikers.
I must say I'm not a huge fan of a lot of the spruiking type things that go on around the place and I think that scepticism is probably cemented by some of the failures that have occurred. There are lots of people around who want to tell everybody what's the best thing to do and how to do it and one wonders why they're sharing that information and charging people for the privilege. So I'm kind of sceptical about some of that sort of stuff and I've had some experience with people who've taken advice seminars and gone out and done what they thought they were told to do - and it's been a disaster for them. You’ve got to be careful that you don't bite off more than you can chew.
I asked Gibson where the name DomaCom is derived from and he explained it was from the Greek word ‘domas’, or house, and ‘com’ representing communication and online access.
Everything operates online, so all they need do is go to domacom.com.au, they can open an account, they can nominate the legal structure they want that to be - and whether it's their individual name or if it's a couple, or a partnership, or a company, or superannuation fund, you can open an account and they can transfer some money they want to invest into a property. And it really can be as little as $2,500. They can transfer that, it goes into a bank account at the ANZ, they have control over that bank account; they can come and go, add to it, withdraw from it. They get an interest rate which is quite attractive I think it’s 2.08% at the moment, so it's the cash rate plus 58 basis points. They get that interest rate and then they can go online and look at what properties are available that they can make a bid on.
And these properties will be partly pledged to by other investors, so we call that a book-billed campaign and as people come in with different amounts of money, $2,500, $5,000, $10,000, whatever, $20,000 and the book-bill grows for, if it's a specific property when it gets to 30% we begin the due diligence process. So we engage a conveyancer to make sure that there's legal entitlement to this property and if it gets to 50%, we engage a valuer to value the property - we don't want to be paying too much for this property, so we need to have an independent evaluation on it. We're not going to listen to what agents have to say, or anyone else.
We then engage our property inspector to go - and these are all external people to us, so they're all independent. The property inspector will go and make sure that the property is sound, that the roof’s not caving in, it doesn't have termites or there are no significant problems with it. As people pledge towards this property, when it gets to 100% we engage a buyer's agent and if it's an auction, he'll go to the auction and bid for the property, or he'll go to the negotiating table and try to acquire the property at the best price he can. It might be an off-market property, for all we know.
By using crowdfunding as a platform, Gibson’s team are able to access the funds for the properties they place on offer before providing a strategy for the interested investor.
I think everybody knows that property comes to market and then four, five or six weeks later it's gone, sometimes even sooner. It may be an auction - the vendors may get an offer before the auction that they're quite happy to take, or they may let it go through to auction. But the selling process is very short and it can take longer than that to raise the funds. Where it's a project, like the energy project or a rural project, they're generally on market for quite some time; or we're raising the capital for the project, so we may have several months to do that. What we did to solve the issue of having the funds first - and that's what crowdfunding is about - it's a chicken and egg problem, what do you need first? Do you need property first or do you need the money? Clearly you need to have the money first. If any of the listeners are going out and buying a property, they don't choose the property, sign the contract and then go off and organise the finance. They get all their ducks in a row - so they get their finance organised first.
So what we put together are strategies, residential strategies, because as I said before the asset, the properties, they're not a problem. There’s hundreds of thousands of properties for sale around the country so that's not an issue. We have a strategy. Now it can be Brisbane, Sydney, Melbourne or a combination strategy, put your money into the strategy. When we've got enough to acquire one or two or three different properties then we can close the book and we instruct a buyer's agent or a property advisor to go out and find us properties that we can acquire. So we get the money together first, in other words. That's a bit of a leap of faith for some people because they say, ‘Well, what is the property I'm investing in? I want to know what it is before I put my money in.’ We can't do that because as you say, we run out of time more often than not so we need to have the funds at the ready and then we go looking for the property.
In order for this scheme to mature and for investors to receive something in return, there is a stipulated expiration date.
Normally with the residential properties, our product disclosure statement has a five-year term to expiry. So when we get it coming up to the end of the five years, we'll then send a note out to all of the investors - and on average we probably have 12 investors per property, that's about the average at the moment. We've got as many as 94 in one farm, but maybe only three or four people in another property. The average across all the properties we have is about 12. So what we do is we'll send a notice out to them saying, ‘We're coming up to five years, it'll be our intention to wind up the sub-fund, sell the property and return the capital to the investors. There are no exit fees, we don't take a share of any of that at all. But if you'd like to keep the property, let us know.’ And provided the people who don't want to stay in can get out by the others buying them out, then we'll roll it over for another five years and we can do another five years after that.
An issue which DomaCom had to remedy is liquidity.
It’s not like, ‘I’ll sell the bathroom because I need $10,000,’ or something like that. Again, it’s an all or nothing proposition - you either sell the whole property or you don't. And that was one of the things that we recognised straight off the bat, that liquidity is an issue. The ability to buy bits of property, that was an issue; the ability to get out partially if you need to, that's an issue. So we applied under our Australian Financial Services licence for an authority to make a market and we received that from ASIC and created an online liquidity facility. And it's basically like a marketplace, a bit like etrade or Commsec or an online share equity trading platform, it has market depth.
You can go into this platform and you can put in a sell order for your units, either all of them or just some of them. You can put any price you like - probably no one's going to pay much more than the current valuation, but who knows? You might be lucky. If you really urgently need your money out as quickly as possible, you will drop the price and somebody will buy it because if the price drops that increases the yield. So let's go back to the equities market - if you need some money quickly and you've got some shares in BHP, you'll go online and you put up 100 BHP shares for $24 bucks, etc. and if no one's buying them because the price is $23.90, you will have to drop your price and as soon as you drop your price, someone will buy them. There's probably already orders in there to buy. So we have an online liquidity facility which means you can get it out at any point in time, you don't have to wait till the five years.
In the event where a lot of people want to get out - similar to a severe share market drop - how would this affect DomaCom as a business?
You have a couple of things there - people recognise that property is a long term investment, if they need money and they've got funds in equities or they've got funds in cash or fixed interest, it's probably better for them to access those funds first rather than access their long term property investment. And I think most people probably understand that second part is we've only done three secondary market traders that were on our platform anyway. So we're only 2.5 years into our first property acquisition, so nobody is really looking to get out.
In disrupting the property industry through this technology and outsourcing many elements of the process, Gibson himself doesn’t identify as a property guru.
We've developed a technology platform built on a robust legal structure that's very widespread in Australia called a managed investment scheme, all property trusts and share trusts are built on these on these schemes pretty much. And we've built a technology platform and legal structure but we're not the property gurus, we don't choose the properties, we let people choose the properties they want, or they can engage a property advisor and have them choose the property. We just operate a platform that enables people to buy and to trade in fractions of property to effectively democratise property and make it available to more people. And you have to realise there are a lot more people out there with $20,000 than there are with $1 million and there's a lot of people out there struggling to get their foot on the property ladder - a lot of young people have just given up hope altogether. And maybe that's why they spent all this money on avocados, I don't know.
It's a struggle, but if you can buy a bit of a property then you've got your foot on the ladder. And here's another interesting element to this and that’s saving for a property. I use my son as an example in this and he's 23 years old and he's got $30-40,000 in the bank or something like that that he's saved from his uni jobs and stuff like that. I say to him, ‘What are you getting?’ ‘I'm getting 1.95% interest.’ I say, ‘That's great, that’s 45 BIPs over the cash rate. That's pretty good.’ He, by the way, is not all that interested in buying a property. Then I said, ‘If you're interested in getting out and going living somewhere, where might you live?’ ‘I might live in Carlton, it sounds like a good spot to be.’ I said, ‘Well, you're saving your deposit for your house income in a bank account and getting 1.95%, but Carlton's going up by 3.45%. The longer you save, the further away you are getting to buy a property. Why don't you buy a fraction of a property in Carlton and that way your money is tracking the Carlton market? And so instead of saving it in the bank account, save it in a property.’
He says, ‘Well how do I get out?’ I said, ‘Well you can use the secondary market or after five years if the fund winds up, you’re out. But any time you can use a secondary market to sell your units. So, in other words, you are saving in the market you want to buy in eventually, rather than saving in a completely different asset class like cash which is not moving ahead.’ So it's a good way for people to save for property and they're probably less likely to go and access some money and fritter it away someplace - not that I think my son will ever do that. That's another way in which you can use fractional property, you could use the DomaCom fund as a savings tool and in fact, soon we'll be launching a family and friends section in our in our platform that will enable mums and dads and aunties and uncles and grandparents and siblings to band together to buy a property and maybe for one of them to live in.
If you would like to contact Gibson to learn more about DomaCom and what they can do to help you with your property goals, you can visit their website.
Go to www.domacom.com.au. DomaCom is - d o m a c o m.
This episode was produced by Andrew Faleafaga with narrations and interviews conducted by Tyrone Shum.