A lot of people want to invest in real estate. When you consider the fact that U.S. home values have increased 50.7% since November 2016, it’s easy to see why. But, not many people have hundreds of thousands of dollars lying around to sink into real estate investing. So, what’s the average Joe to do? Consider fractional ownership in real estate.
What is fractional ownership in real estate?
Fractional ownership is when a group of investors comes together to pay for the overall cost of purchasing and maintaining a property. The costs and profits are “fractured” among many participants. There are property management companies that manage and oversee the maintenance of the home and tenant needs.
You can think of fractional real estate investing similar to how you think of the stock market. You would never attempt to purchase Walmart, Apple, Tesla, or any other corporation—unless you’re Bill Gates, maybe—but you would purchase shares of these companies through the stock exchange.
Benefits of fractional real estate investing
As you can imagine, there are several benefits to fractional real estate investing, including
Lower barrier to entry
You don’t have to be Donald Trump to start investing in real estate, thanks to fractional ownership. When you purchase a fraction of a property, you only have to pay a fraction of the price. This means you can get started building your real estate investment portfolio with as little as $5 in some cases.
Lower operating costs
Who said investing had to be expensive and risky? With fractional real estate investing, you don’t have to worry about fronting the cost for expenses associated with traditional real estate investing, such as
- Property tax
- Insurance
- Utilities
- Maintenance
- Landscaping
- Buying and replacing fixtures and furniture
By sharing the burden of the operating costs, the burden is much lighter in your pocket.
More flexibility
Today’s world moves faster than ever, and markets are quite volatile these days. For these reasons, it’s important to have some investments that have flexibility. Fractional real estate investing does this in several spheres, including by
- Deploying a professional team to manage the property, meaning you’re not tied down by management duties.
- Having a large group of investors, which means more ideas, opinions, collaboration, and contributions.
- Allowing for more liquidity. Investors can sell their shares with the click of a button on some platforms.
Earn income passively
Even though investing in traditional real estate is extremely profitable, it’s also quite a hassle. From landscaping to bursting pipes, smoke alarms, fighting tenants, and renters who won’t pay, the list of potential headaches go on. When you invest in fractional real estate, you don’t have to worry about any of that. Once you make your investment, you can sit back, relax and collect your dividends without having to get out of bed at night to put out fires—literally and figuratively.
Fractional real estate investors are taken care of by a professional and experienced team that manages all of the property’s needs, as well as the needs of tenants and renters.
Diversify your investment portfolio
A diversified investment portfolio is a surefire way to boost your chances of high returns. Investing in fractional real estate is a straightforward way to help diversify your portfolio in two distinct ways:
- You get to start investing in real estate, which is diverse in its own right.
- The money you save through shared ownership allows you to have more cash on hand to pour into the stock market, cryptocurrency, or of course, more shares of fractional real estate.
Fractional ownership in real estate: things to consider
Before you get too excited after reading all of the amazing benefits of fractional real estate investing, there are some potential drawbacks that you also need to consider, including
You have less control over the details
Unlike when you are the sole owner of real estate assets, fractional real estate investments don’t give you total control over your investments.
If you use a platform for your fractional real estate investments, the terms of control are typically pre-determined and outlined in the terms and conditions. Platforms take full control of the project, meaning most of the time, investors don’t get to make any decisions unless something goes colossally wrong.
It can be hard to get started
If you choose not to use a platform to help streamline your fractional real estate investing, you’ll likely have a pretty hard time rounding up investors, getting all investors to agree with terms, getting the investors to pay, purchasing the property, maintaining the property and tracking and distributing dividends. You’ll likely have a harder time if you do your fractional real estate investing sans platform than you would with a traditional real estate investment.
There may be difficulty understanding the terms of the agreement
As we mentioned, the terms and conditions are pre-set and laid out on the platform’s website. You have no say and if you have any questions, you will typically have to wait for the next business day to get an answer. If you use more than one platform, it can get even more confusing because each platform has its own set of rules and conditions. It can be hard to keep them all straight and the platform can change them at will.
Final thoughts
When you compare fractional real estate to other types of fractional ownership, like a timeshare, fractional real estate is the superior choice. This is because your shares will increase value over time as the home value increases. Timeshares depreciate and you likely won’t get anything out of them in the long run besides a few family vacations.
Fractional real estate is particularly a great choice for people who are just getting started investing and who may not have thousands of dollars to get started. Fractional real estate investing allows you to get a feel for the real estate market and invest without spending too much money or having too much risk to worry about.
