Want to start investing in real estate but don’t have the funds to buy an entire property? Fractional real estate investing may be the answer you’re looking for. Fractional investing offers a lucrative opportunity to own a portion of a property rather than the entire property.
Fractional ownership of real estate is affordable for startup investors looking to enter the real estate market. But what is fractional investing? And is this the right investment model for you?
This article is a comprehensive guide to fractional real estate investing. You will also learn about the pros and cons of this investment strategy. You can then decide if it aligns with your financial goals.
What is fractional real estate investing?
Fractional real estate investing involves multiple investors owning a portion of one or more properties. Fractional ownership allows you to invest in real estate with less capital. This is a strategy where you own part of one or more properties and receive partial ownership and a share of the financial benefits.
7 ways to invest in fractional real estate
Partial real estate investment is gaining popularity. Online platforms and real estate marketplaces make it easy to find investment opportunities. Diversify your portfolio and manage your investments more easily. Fractional investing also provides liquidity by allowing fractional shares to be bought and sold.
Here are seven fractional ownership models to consider.
1. Build partnerships
Building a partnership is a common fractional investment model. In this method, individuals pool their resources and skills to purchase investment property. Each partner contributes resources such as capital and expertise. We also share the risks, responsibilities, and rewards of investing.
A real estate partnership typically involves forming a limited liability company (LLC) or limited liability partnership (LP). Depending on the structure, partners can have an active or passive role. Also, the liability of limited partners depends on their involvement and investments. The general partner is responsible for the day-to-day operations of the investment property.
2. REIT
Investing in real estate investment trusts (REITs) is a popular form of fractional real estate investing. These investments provide real estate opportunities without high upfront costs. REITs also allow you to develop a diversified portfolio across multiple types of real estate. If you want to invest passively, buying REIT shares is a good option.
How do REITs work? Fractional investors buy shares or units in REITs. A team of experts manages investment trusts. Receive dividends from rental income, interest, or capital gains on REIT properties. Publicly traded REITs provide liquidity because they are bought and sold on stock exchanges.
3. Real estate syndication
A real estate syndicate is a way to start investing in fractional real estate. Syndication involves multiple investors pooling their resources to invest in real estate. You can benefit from owning real estate without having a lot of capital or property management expertise.
The syndicate sponsor is the general partner who oversees the investment strategy. Investors provide funds and play a passive role.
The biggest advantages of syndication are:
4. Crowdfunding platform
Real estate crowdfunding platforms make investing in the real estate market accessible to more investors. Crowdfunding platforms allow you to pool your money with other investors to buy shares in a real estate project. You can diversify your investments across multiple asset classes, property types, and geographies.
Crowdfunding platforms are often an affordable entry point for small investors. Provides access to real estate investment opportunities. This way, you can build your portfolio and enjoy financial benefits such as passive income and real estate appreciation.
Here are some popular crowdfunding platforms for fractional real estate investing.
- Arc 7: This real estate platform allows you to buy shares for as little as $20 and receive regular dividends from your rental income. However, Ark7’s fees can be higher than other platforms.
- Arrived: This real estate investment platform is popular for rental properties. Individual investors can start investing with as little as $100. However, the asset must be held for at least five years, which may be too long for short-term investors.
- concrete: This crowdfunding model allows you to invest in real estate with a minimum investment of $1. Allows non-accredited investors and pays weekly dividends. However, the yield is only 5.5% and there is only one investment option.
- Donation: This real estate investment platform provides access to equity and fixed income investments. The initial investment is only $10. Also, invest your balance based on your financial goals. However, quarterly returns are not guaranteed.
- Noble: With this fractional ownership platform, you can access the real estate market for as little as $50. The platform offers tradable blockchain-based tokens and pays a regular rental yield. However, some investors do not like dealing with crypto-based tokens.
- Yield Street: If you are looking for an alternative investment, this crowdfunding company is a good choice. You can buy stocks in a variety of industries, including real estate, law, and the arts. However, it is more suitable for accredited investors.
5. Vacation rentals
Fractional ownership of vacation properties is a way to diversify your portfolio. Purchasing a portion of a vacation home gives you the benefits of ownership with access to the vacation home. You have access to the facility for a certain number of weeks each year.
Fractional ownership of a vacation property should not be confused with a timeshare. When you invest, you own a portion of the equity in the property and become a co-owner. Unlike timeshare properties, fractional ownership can be sold, gifted, or placed in a trust. You can also stay in villas at luxury resorts or rent them out when not in use.
6. Tokenized real estate
Real estate tokenization allows fragmentation of ownership of real estate using blockchain technology. Some real estate platforms offer real estate tokens that represent pieces of investment real estate. Investors can buy real estate tokens and assume partial ownership for as long as they can afford.
Tokenized real estate assets have the following benefits:
- Low minimum requirements
- Improving liquidity
- Access to global markets
- Investment opportunities for small investors
That said, tokenized real estate investments can be more volatile and suffer from a lack of transparency.
7. Real Estate Exchange Traded Fund (ETF)
Exchange-traded funds (ETFs) make it easy to invest in fractional ownership real estate. These funds are typically invested in REITs and traded like stocks and bonds. ETFs aim to replicate the performance of a specific real estate index or sector.
Investing in ETFs provides diversification. For example, risk is reduced when you invest in multiple companies that own investment properties. Additionally, dividend payments tend to be higher and you benefit from increased liquidity. However, interest rates can affect ETF performance.
Advantages of split real estate investment
Fractional real estate investing allows you to easily enter the real estate market. You can acquire fractional ownership of a vacation property with minimal upfront costs.
Here are five benefits of fractional investing:
1. Low barriers to entry: If you have limited funds, you can enjoy the benefits of real estate ownership by dividing it up. Purchasing fractional shares can be more affordable than purchasing an entire rental property.
2. Diverse real estate portfolio: Owning parts of multiple properties makes it easy to diversify your investment portfolio. This gives you access to a variety of markets and property types. Additionally, spreading your investment across multiple properties reduces risk compared to investing in a single property.
3. Improved liquidity: Online investment platforms typically allow you to buy and sell fractional shares. This gives you easier access to cash and more flexibility than traditional real estate investing.
Four. Professional management: Fractional ownership reduces the day-to-day stress associated with managing a rental property. There’s no need to screen tenants, deal with maintenance issues, or lose rental income due to vacancies.
Five. Earn passive income: Fractional ownership in the rental market allows you to earn regular income from rent payments. An additional benefit is that the potential value of the asset increases once the asset is sold.
Risks and considerations
Like any other type of investment, investing in real estate installments comes with some risks. For example, you will have less control over your assets and investment strategy. And the real estate market can fluctuate.
Here are some risk considerations before you start investing in fractional real estate.
- Housing market risks: Investing in fractional ownership real estate is subject to market risk. Factors that affect the performance of real estate investments include:
- Changes in asset value
- market demand
- rental income
- vacancy
- economic situation
- Out of control: Fractional ownership of real estate means sharing control with multiple other investors. Being a passive investor can be appealing to some people, but it’s not ideal if you want to be in control of your decisions. The more stakeholders there are, the less say they have over property management and investment strategy.
- Potential conflicts: Fractional ownership of a property means you will likely be dealing with an unknown co-owner. This situation can lead to conflicts regarding financing, retention, and exit strategies.
- Lower profit: Returns may be lower than traditional real estate investments. Property management companies and crowdfunding companies may charge fees. Also, returns must be shared among multiple investors.
- Limited exit strategy: Not all investment platforms offer liquidity options and may incur high fees if you want to exit before a certain time. Additionally, there may be associated costs and complexities to selling fractional shares through the secondary market.
Who benefits from fractional real estate investing?
Purchasing fractional ownership of a property may or may not be the best strategy, depending on your financial goals.
Investing in fractional real estate is typically suitable for investors who:
- Individual investors with limited funds: You can start a real estate business even with limited funds.
- For beginners in real estate investment: These investors can enter the real estate market with small investments and little experience in property management.
- Diversify your portfolio. Do you need a diversified portfolio? If so, you can spread your investments across different properties and locations.
- Passive investors: You can earn regular income from your rental unit without worrying about real estate ownership.
- Access to luxury properties: Gain a foothold in the luxury real estate market and own a piece of expensive real estate or a villa at a luxury resort.
final thoughts
Investing in fractional real estate can be a good investment strategy. This is especially true if you want to enter the real estate market with limited funds. Investing in a portion of an investment property can be more affordable than purchasing the entire property. Benefit from increased liquidity and professional management, and earn passive income through rental payments.
It’s important to consider your long-term financial goals and risk tolerance before taking the plunge into investing in real estate fractions. Let’s consider the advantages and disadvantages of fractional ownership of real estate. That way, you can make informed decisions as you begin your wealth-building journey.
Passive investment through syndication
Want to invest in real estate but don’t have the time? Regardless of your level of experience, real estate syndicates offer a means to invest in real estate without tenants, toilets, or trash. This comprehensive guide will show you how to invest in these opportunities the right way.
Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.