With fractional ownership investing, you own a portion of a property yet still receive the same advantages as if you had bought the entire asset. You get to enjoy all the benefits of real estate investing without worrying about expenses, property maintenance, or anything related.
Fractional ownership investing is becoming a more popular way to buy property in the real estate market. It allows investors to buy a percentage stake in various properties, with others splitting the cost and ownership of the asset. Once in place, fractional real estate is significantly cheaper than purchasing an entire property. It can also sometimes generate a better return for its owners than buying a whole property outright.
Fractional real estate is a low-risk, high-growth investment that offers many advantages to investors and non-investors. It allows you to buy a part of a property instead of the entire asset, which means you can become an owner without putting large amounts of cash down. A fractional real estate investor can also choose from various properties in different locations, diversifying their portfolio even more to achieve better returns.
The Process
A business purchases a piece of property. Although it is primarily commercial real estate, it could also be residential. The company divides the property’s price into fractional shares, which they then market to investors.
Anyone who invests receives cash flow from the rent paid on the asset. As an investor, it’s important to note if the property is already producing income or is still under development.
Pros & Cons of Fractional Ownership Investing
A fractional ownership agreement is a relatively new investment in real estate. Not many people realize all of the benefits and drawbacks of fractional ownership. While there are some fantastic advantages to fractional ownership, there are a few things you need to be aware of before investing. This guide will highlight some of the most important pros and cons before becoming a fractional real estate investor.
Lower Barrier to Entry
Across all of real estate, the fractional ownership investing model represents a great way to start investing with relatively small sums of money. As an investor, this means you can enjoy returns on properties in markets that may not have been reachable otherwise due to the size of the original investment needed. And on top of the initial investment required being smaller, the returns occur more quickly since you will also earn equity in the property as value grows.
Investing in rental properties with other people’s money can help you access assets, especially if you don’t have the necessary down payment. With multiple owners sharing in costs and profits, a high-end condo, resort, residence club, or vacation home becomes attainable without years of saving (and missing out on opportunity costs). Plus, these rental properties are unlikely to sit empty for too long since they are in high demand, increasing your potential rental income.
Passive Income
As a fractional property owner, you can enjoy the benefits of passive income and building wealth. Because the value of each person’s share increases as the property appreciates, you also have the potential for cash flow from tenants if the property rents.
And with a management company handling both the purchase and the financing of the real estate investment, you can rely on their expertise, saving you a lot of time and resources on research and other fees that go along with real estate investing.
Deeded Ownership
Fractional ownership is a great way to share the cost of a vacation home without paying for everything yourself. Fractional ownership is often understood as a timeshare model, but there are critical differences between these two. When you buy a fractional share in a property, you receive a deed for your equity portion, which means you have the right to sell, gift, or inherit the property and place it in a trust.
Share the Cost of Maintenance and Taxes
Shared ownership means that you and other co-investors own the property. Shared expenses during this stage, like taxes, insurance, and HOA fees, are tax-deductible. You’re also responsible for repairs to the property. Whether you sell your home as a fractional or complete owner, your share of the proceeds will be subject to capital gains tax.
Easier to sell than a wholly-owned property
Fractional real estate is a cheaper way to invest in property. You can secure your piece of it for a fraction of the price of buying an entire property. This means that even if someone else buys part or all of your share, you still retain an investment in that property. When you eventually sell your stake, you have to pull out from the investment, allowing your shares to be re-listed and sold again.
Easier to diversify
With fractional ownership, you can diversify your real estate investing. For example, shared ownership allows you to participate in vacation home ownership while investing in commercial and residential real estate while simultaneously making your mortgage payments. Since all your resources aren’t tied up in a single large investment, you can spread your resources out among different types of real estate or set your sights on a single location or neighborhood in the same city. You can specialize in a single class or area or keep diversifying and taking advantage of market ups and downs variations.
Less Control
With full ownership of a property, an investor has a complete say in all decisions concerning the property. However, with fractional ownership, all owners have a say in the management of the property, including maintenance, repairs, and decor. This can sometimes cause disagreements. Sales also have to be approved by all ownership partners. Make sure to review all real estate syndication contracts with a professional.
Costlier Management
Fractional real estate can be a great way to build wealth with real estate without having to take on the burden of ownership. You can enjoy the benefits of a rental property through fractional ownership without worrying about maintenance or upkeep. And while there can be additional costs associated with managing this type of investment, it’s far less than owning a home or condo outright. If you want to consider investing in real estate but don’t want the hassle and risk of dealing with mortgages, cleaning fees, and other expenses, then fractional real estate may be for you.
Buying a fraction of a property is a great way to get into real estate investing, and the benefits are many. If, after reading through this fractional ownership guide, you decide this model is suitable for you, starting is as easy as signing up on a platform such as Fundrise, Crowdstreet, or Arrived, selecting a property from their portfolio, and making your first investment.
