Real estate properties are fixed assets that can be very expensive. The cost starts with the initial purchase of the property, extends through to maintenance and includes other various expenses along the way (i.e. property tax, insurance etc.). So the purchase of a property is a huge investment.
However, there are ways around dropping a huge sum of money into a property.
That’s where fractional real investment comes into play. This type of investment is one of the cheapest ways to expose yourself to the property market. Asides from a reduced capital, there are many benefits of fractional real estate investing.
What Is Fractional Real Estate Investing?
Fractional real estate investing (also known as Fractional ownership) is becoming increasingly popular among people that intend to make money from investing in property. Sadly, many people have misconceptions about how this works.
Before proceeding, let’s understand the concept of this real estate investment.
Fractional real estate investing allows many investors to come together to fund an investment property. This allows all stakeholders to share ownership of high value assets without having to pay for the whole investment themselves. Both expenses and income are shared among investors depending on their financial commitment. Some investors can include other responsibilities as part of the basis for income sharing.
The concept of fractional real estate investing might not be common in low-cost properties like residential homes. But it is a perfect approach for expensive real estate assets like commercial properties, hotels and resorts, vacation homes, stadiums, and many others.
Fractional real estate investing comes with lots of benefits and some drawbacks. So, it is best to make careful evaluation of this investment before diving in.
The Benefits of Fractional Investments
1. It is a Passive Investment
The first advantage is that this type of investing is completely passive. In most cases, the responsibilities of management come down to an experienced third party, who professionally manage the property, organize any repairs, find and manage clients and deal with the legal requirements.
The only thing an investor is required to do, is sign up with a platform and click on “invest”.
2. It Allows Those with Low Capital to Invest
Investing in real estate can be too expensive for those that don’t have a lot of capital. One of the significant benefits of fractional investments is that it does not discriminate depending on your income or the amount you have saved. You may be able to start investing with sums as low as €50 or even €10 in some cases.
The entire upfront cost required for fractional ownership is a lot lower than owning a personal real estate property.
3. It Allows For Easy Diversification
By only buying parts of a property, you are able diversify your investment into several assets, reducing any chances of a poor investment.
Earn passively from all your investments without much hassle!
4. Access To Higher Returns
Contrary to certain opinions, fractional investments allows more capital to purchase properties, allowing better properties with a chance of higher returns.
If you are investing through a platform, this type of investing also allows for a team to actively manage the portfolio, meaning that someone could be in charge of the legalities, someone in charge of management and someone in charge of finding new properties. Overall, by keeping these skills in-house, a greater overall return is able to be achieved.
If you invest as a partnership, democratizing ownership and effective management increases possible returns from the investment.
Fractional real estate investing allows flexible operation in various spheres. It allows you to engage professionals; hence, saving you avoidable stress like tenant management. Similarly, having lots of investors allows additional ideas, opinions, and contributions.
Also, fractional real estate investment allows more liquid and flexible contribution. In some platforms, investors have are able to sell their shares at any time (through secondary markets). However, this flexibility is dependent on the structure and pattern of agreement binding all investments.
The Drawbacks of Fractional Investments
Like every other form of business, fractional real estate investment can have certain drawbacks that might cause major upset. Below are some of the notable drawbacks of fractional real estate investment:
1. Less Control
Unlike sole ownership of real estate assets, fractional investments do not give you total control over affairs.
If you invest in a platform, the terms of control are usually set out in any terms and conditions. Platforms generally take full control of the project, and investors may only get a say when something goes wrong.
If you create your own partnership, the investment runs on a democratic setting where all investors have to be consulted before making a decision. This mode of operation limits the control of individual investors because control is collective.
2. Difficult to Start-up
Getting started with fractional real estate investment might be slightly challenging (if your not using a platform). Aside from the legal procedures involved acquiring real estate assets, you will also need to prepare a contract agreement that will guide all investors.
Drafting the agreement and getting all investment to agree with it can be somewhat challenging. Also, getting all investors to agree to the terms and make financial commitment can be a hassle as well.
3. Problem With Understanding Terms of Agreement
If you are joining a fractional investment platform, understanding the terms and agreeing to it might be a problem. Each platform may have different terms, and these may be subject to change at the drop of a hat.
It is best to contact a commercial real estate lawyer to ensure proper negotiation and terms.
How Do I Invest?
Making fractional real estate investment is quite easy. All you need is to find a platform that aligns with your interests, and have some money ready to invest. You may be able to buy shares in properties that already exist, or you may have to invest in something new and upcoming.
Best of all, there are already some platforms available to help you get started!
You can invest with reliable real estate companies like Reinvest24, BulkEstate, and EvoEstate. These companies save you the stress of looking for investors, drafting new agreements, and managing the investments.
All you have to do is contact them, choose the most suitable package for you, and make financial commitment. These companies will inform you of the potential percentage yield, and you don’t have to worry about operations.
Alternatively, if there is no platform, you can bring other investors together to draft an agreement and make a financial commitment to buying a real estate asset.
Fractional real estate investing makes it easier for lots of investors to go into real estate. It allows investors to pull capital together and buy a real estate asset that would have otherwise been too expensive for an individual. Each investor makes a financial commitment and the income will be shared according to each commitment.
Fractional investment comes with loads of benefits, including flexibility and passive involvement. It also has certain drawbacks, particularly limited control. It is best to make a thorough evaluation of this investment before making any commitment.
Ensure that you understand all investment terms and conditions before making any financial commitment. Also, consider contacting a commercial real estate lawyer before making a real estate investment.
This was just one of many investing ideas that we have for you. If you want to find out other ways to invest, check out our list of additional investment ideas.