Fractional Real Estate Investing: A Beginner’s Guide

Real estate has long been recognized as a popular investment asset class due to its potential for long-term returns, wealth preservation and diversification benefits. However for many investors, home and property ownership has been a major challenge due to the rising prices of real estate assets in both the residential and commercial real estate markets.

Thanks to the evolution of real estate investing, there are now many different ways in which investors can tap into the real estate market. From buying REIT (Real Estate Investment Trust) and REIG (Real Estate Investment Group) shares to flipping houses and selling them, real estate investors have many options to consider when it comes to investing in real estate.

Fractional real estate is one of the investment strategies that has become popular among real estate investors today. In this blog, we highlight the basics of fractional real estate and the pros and cons to consider before getting started.

Key Takeaways

• Fractional real estate investing is a form of investment where multiple investors pool their resources to collectively invest in a real estate property
• Fractional real estate ownership can work in different ways. The first option is whereby the investors can get a deed and equity in the property or buy shares in a property. Option two is investing in a REIT, option three is timeshare ownership of vacation properties and option four is investing through crowdfunding platforms,
• The different types of fractional real estate investing include: Fractional ownership of properties, Real Estate Investment Trusts (REITs), real estate crowdfunding, real estate funds, real estate syndication, real estate partnerships and real estate exchange-traded funds (ETFs)
• Some pros of fractional real estate investing include: Diversification of your investment portfolio and low barrier to entry. Some cons include limited control over the property and potential lower returns
• Before you start investing in fractional real estate, be sure to consult a certified financial advisor or a real estate advisor so they guide you in evaluating the suitability and potential returns of various fractional real estate investments

Disclaimer

The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning, financial management, and real estate here. More on disclaimers here.

What is Fractional Real Estate Investing?

Fractional real estate investing is a form of investment where multiple investors pool their resources to collectively invest in a real estate property. Instead of purchasing an entire property individually, a real estate investor can buy fractional shares or equity in the investment property. These fractional shares represent partial ownership of the property and provide investors with a proportional share of the property's financial returns.

The concept of fractional real estate investing has gained popularity with the rise of online platforms and real estate marketplaces. These platforms facilitate the process of finding investment opportunities, managing the investment and enabling liquidity by allowing investors to buy and sell their fractional shares.

How Does Fractional Ownership Work?

Fractional ownership works by allowing multiple investors to collectively own a property. There are several ways in which individuals can invest in fractional real estate. The first option is whereby the investors can get a deed and equity in the property or buy shares in a property. Getting a deed and equity can be an attractive investment opportunity for individuals seeking ownership rights and potential financial benefits.

With this option, investors typically acquire a fractional share of the property and receive a deed that represents their ownership interest. Where investors buy shares in a property, they basically purchase shares or units that represent their ownership interest in a specific property.

The second option is by investing in a REIT. Investing in a Real Estate Investment Trust (REIT) is a popular form of fractional real estate ownership. By purchasing shares or units of a REIT, investors gain exposure to a diversified portfolio of income-generating real estate assets.

The REIT is professionally managed, allowing investors to benefit from the expertise of the management team. Investors receive dividend distributions from the rental income, interest or capital gains generated by the underlying properties. Investing in a publicly traded REIT provides liquidity, as shares can be easily bought or sold on stock exchanges.

Option three is timeshare ownership of vacation properties. This model offers individuals a unique way to enjoy vacation homes without the full financial commitment of sole ownership. With this options, investors purchase a fraction of the property, typically for a specific time period each year, and gain exclusive access to the property during their allocated time.

Lastly, fractional ownership can be facilitated through crowdfunding platforms, which provide an innovative way for individuals to invest in real estate projects collectively. Crowdfunding platforms allow investors to pool their capital and collectively purchase shares or interests in a property or real estate project.

This approach enables smaller investors to access opportunities that would typically be out of reach due to high capital requirements. Through crowdfunding platforms, investors can diversify their real estate portfolios, access a wider range of investment opportunities, and potentially benefit from regular income distributions and potential capital appreciation.

Types of Fractional Real Estate Investing

There are several types of fractional real estate investing, each offering different opportunities for investors. Here are some common types:

Fractional Ownership of Properties

This involves multiple investors collectively owning a property, with each investor holding a fractional share. The property can be residential, commercial or a vacation rental. Investors share the ownership costs and can earn rental income or potential capital appreciation based on their share.

Real Estate Investment Trusts (REITs)

A REIT (Real Estate Investment Trust) is a company that owns, operates or finance income-generating real estate properties. Investors can buy shares of publicly traded REITs, which provide exposure to a diversified portfolio of properties. REITs typically distribute a significant portion of their income to shareholders as dividends.

Real Estate Crowdfunding

Crowdfunding platforms enable individuals to invest small amounts of money in real estate projects. Investors pool their funds to finance a specific property or development, and they receive returns based on the project's performance. Crowdfunding platforms provide access to a variety of real estate opportunities and allow investors to diversify their portfolios.

Real Estate Funds

These are investment vehicles managed by professional fund managers who pool investor capital to invest in various real estate assets. Real estate funds can focus on specific property types (e.g. residential, commercial and industrial) or investment strategies (e.g. value-add and opportunistic). Investors earn returns based on the fund's performance and distributions.

Real Estate Syndication

Syndication involves a group of investors pooling their resources to invest in a specific real estate project. One or more individuals or entities, known as sponsors or syndicators, lead the project and handle its management. Investors contribute capital and receive a share of the project's profits based on their investment.

Real Estate Partnerships

Partnerships are formed when multiple individuals or entities come together to jointly invest in a real estate venture. Each partner contributes capital, expertise or other resources, and they share the risks, responsibilities and rewards of the investment. Partnerships can be structured in various ways, such as limited partnerships (LPs) or limited liability companies (LLCs).

Real Estate Exchange-Traded Funds (ETFs)

ETFs are investment funds traded on stock exchanges that aim to replicate the performance of a specific real estate index or sector. Real estate ETFs provide investors with diversified exposure to the real estate market and can be bought and sold like stocks.

Who Should Invest in Fractional Real Estate?

Fractional real estate investing can be suitable for various types of investors. If you're among these investors, then investing in fractional real estate might be a great option for you.

Beginner Real Estate Investors

Fractional ownership allows individuals with limited capital or little experience in real estate investing to enter the market. It can serve as a stepping stone for those who want to gain exposure to real estate without committing to a full property purchase.

Investors Seeking to Diversify Their Investment Portfolio

Investors looking to diversify their investment portfolios can benefit from fractional real estate. By owning shares in multiple properties across different locations or property types, they can spread their risk and potentially enhance their overall portfolio performance.

Passive Investors

Fractional real estate investments can be appealing to those who prefer a more passive approach. The property management tasks, such as tenant selection and maintenance, are typically handled by the platform or company offering the investment. This allows investors to enjoy the potential benefits of real estate ownership without active involvement.

Investors with Limited Time or Expertise

Managing a rental properties or engaging in real estate transactions can require significant time and expertise. Fractional ownership provides an opportunity for investors to access professionally managed properties and leverage the expertise of the platform or company handling the investment.

High-Cost Market Participants

Fractional real estate can be particularly attractive in high-cost markets where individual property purchases may be financially challenging. It allows investors to participate in desirable locations or markets that would otherwise be difficult to access due to high property prices.

Real Estate Enthusiasts

Individuals with a passion for real estate may find fractional ownership appealing. It provides an avenue for them to invest in and own a stake in properties they find interesting or exciting without having to invest substantial capital.

Top 5 Fractional Ownership Platforms to Invest in

1. Fundrise

• Minimum inInvestment Requirement: $10
• Accreditation Required: None
• Average Annual Returns: Approximately 8-9%
• Fees: 1% annual management fee

2. Arrived Homes

• Minimum Initial Investment: $100
• Accreditation Required: None
• Average Annual Returns: Approximately 3-8% in dividend payments
• Fees: 1% annually

3. Lofty

• Minimum Initial Investment: $50
• Accreditation Required: None
• Average Annual Returns: Approximately
• Fees: Varies by property

4. Yieldstreet

• Minimum Initial Investment: $10,000
• Accreditation Required: None
• Average Annual Returns: 8% annualized distribution rate
• Fees: 1.5% annual management fee

5. HappyNest

• Minimum Initial Investment: $10
• Accreditation Required: None
• Average Annual Returns: 6% in dividend payments
• Fees: Varies by property

Pros & Cons of Fractional Real Estate Investing

Fractional real estate investing, like any investment strategy, has its own set of advantages and disadvantages. Here are some key pros and cons to consider:

Pros

Diversification of your investment portfolio. Fractional ownership allows investors to diversify their real estate portfolios by owning fractional shares in multiple properties. This diversification can help spread risk across different locations and property types.

Lower barrier to entry. Through fractional ownership, investors are able to participate in real estate with a lower initial investment compared to purchasing a whole property. It provides access to the real estate market for individuals with limited capital.

Professional Management. Fractional ownership platforms often handle property management tasks such as tenant selection, maintenance and administrative responsibilities. This can alleviate the burden of day-to-day property management for investors.

Ability to earn passive income. By investing in fractional real estate, investors have the opportunity to earn income through rental payments and potentially benefit from property appreciation when it is sold.

Liquidity. Some fractional ownership platforms provide liquidity options, allowing investors to sell their fractional shares to other investors or exit their investment before the property is sold. This offers a level of flexibility and potential liquidity that may not be available with traditional real estate investments.

Cons

Limited control. As a fractional owner, you have limited control over the property and decision-making processes. The property management and major decisions are typically handled by the platform or company managing the investment.

Potential lower returns. While fractional ownership provides access to potential returns, the returns may be lower compared to owning an entire property. This is because the profits are divided among multiple investors.

Market risks. Fractional real estate investments are still subject to market risks. Property values can fluctuate, and rental income may be affected by economic conditions, vacancies or changes in rental demand. The overall performance of the real estate market can impact the returns on fractional ownership investments.

Conflict among co-owners. When multiple investors acquire property together, conflicts can arise due to differences in decision-making, financial contributions, property use and maintenance responsibilities. Disagreements on these matters can hinder the smooth operation and growth of the investment.

Limited exit options. While some platforms offer liquidity options, the ability to sell fractional shares may be subject to certain restrictions or limited buyer demand. Exiting an investment may not be as straightforward or immediate as with other forms of investments.

Is Fractional Ownership a Good Investment?

Whether fractional ownership is a good investment or not depends on various factors and individual circumstances. It can be particularly appealing for individuals who want to invest in real estate but have limited capital or prefer a more passive investment approach. It can provide access to different types of properties and markets, potentially increasing diversification and reducing risk.

However, it's important to consider the potential drawbacks of fractional ownership, such as limited control over decision-making, potential conflicts among co-owners and liquidity constraints. Thorough research, due diligence and understanding the specific terms and conditions of the investment are crucial.

Consulting with a certified financial advisor or a real estate advisor can provide valuable guidance in evaluating the suitability and potential returns of fractional real estate investments

Bay Street Capital Holdings

Bay Street Capital Holdings is a Black-owned independent investment advisory, wealth management and financial planning firm headquartered in Palo Alto, CA. The firm manages portfolios with the goal of maintaining and increasing total assets and income with a high priority on managing total risk and volatility.

Bay Street was founded by William Huston after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan. In 2021, he was recognized as Investopedia’s Top 100 Financial Advisors for 2021. In California, only two Black-owned firms out of nineteen firms received this recognition.

In 2021, Bay Street was selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR). Bay Street was founded to advocate for diverse and emerging fund managers and entrepreneurs.

Sources

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https://www.bankrate.com/investing/fractional-real-estate-investing/

https://thecollegeinvestor.com/39919/fractional-real-estate-investing/

https://propertyalchemy.com.au/fractional-investment-what-is-it-and-how-does-it-work/

https://www.baymgmtgroup.com/blog/fractional-real-estate-investing/