Do you want to get started in real estate investing but don’t have the funds to purchase an entire property? Fractional real estate investing may be the answer you’re looking for. Fractional investing offers lucrative opportunities to own part of a property rather than an entire one.
Fractional real estate ownership can be affordable for startup investors who want to enter the real estate market. But what is fractional investing? And is this the right investing model for you?
This article is a comprehensive guide to fractional property investing. You’ll also learn 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 several investors owning a portion of one or more properties. With fractional ownership, you can invest in real estate with lower capital. It’s a strategy to own a portion of one or more properties, giving you partial ownership rights and a share of financial returns.
7 Ways to Invest in Fractional Real Estate
Fractional real estate investing has gained in popularity. Online platforms and real estate marketplaces make it easier to find investment opportunities. You can diversify portfolios and manage investments more easily. Fractional investments also offer liquidity by enabling you to buy and sell fractional shares.
Here are seven fractional ownership models to consider.
1. Create a partnership
Creating a partnership is a common fractional investment model. This method involves individuals pooling resources and skills to purchase an investment property. Each partner contributes resources such as capital and expertise. They also share the risks, responsibilities, and rewards of the investment.
A real estate partnership typically involves creating a limited liability company (LLC) or a limited partnership (LP). Depending on the structure, partners can have an active or passive role. Also, the liabilities of limited partners depend on their involvement and investment. The general partner is responsible for the everyday operations of the investment property.
Investing in real estate investment trusts (REITs) is popular in fractional property investing. These investments give you real estate opportunities without high initial startup costs. REITs also allow you to develop a diversified portfolio across several property types. Buying shares in a REIT can be a good option if you want a passive investment.
How do REITs work? Fractional investors purchase shares or units of a REIT. A team of professionals manages the investment trust. You receive dividends from rental income, interest, or capital gains of the REIT properties. Publicly traded REITs offer liquidity because shares are bought or sold on stock exchanges.
3. Real estate syndication
Real estate syndication is a way to get started in fractional property investing. Syndication involves multiple investors pooling their resources to invest in property. You get the benefits of owning real estate without much capital or expertise in property management.
The syndicate sponsor is the general partner who oversees the investment strategy. Investors contribute capital and take on a passive role.
The biggest benefits of syndication include:
4. Crowdfunding platforms
Real estate crowdfunding platforms make investing in property markets accessible to more investors. Crowdfunding platforms let you pool capital with other investors to buy shares in real estate projects. You can spread investments across multiple asset classes, property types, and regions.
Crowdfunding platforms are often an affordable entry point for smaller investors. They give you access to real estate investment opportunities. This way, you can build a portfolio and enjoy financial benefits like passive income and property appreciation.
Here are some popular crowdfunding platforms for fractional real estate investing:
- Ark7: This real estate platform lets you buy shares for as little as $20 and receive regular dividends from rental income. However, Ark7 fees can be higher than other platforms.
- Arrived: This real estate investing platform is popular for rental properties. Individual investors can start investing from $100. However, you must hold assets for at least five years, which may be too long for short-term investors.
- Concreit: This crowdfunding model lets you invest in real estate with a minimum investment of $1. It allows non-accredited investors and pays weekly dividends. However, it only pays 5.5% returns and only has one investment option.
- Fundrise: This real estate investment platform offers access to equity and debt investments. It has a small initial investment—as little as $10. It also invests your balance based on your financial goals. However, quarterly returns are not guaranteed.
- Lofty: This fractional ownership platform lets you access real estate markets for as little as $50. The platform offers tradable, blockchain-based tokens and pays out regular rental yields. But some investors don’t like dealing with crypto-based tokens.
- Yieldstreet: If you are looking for alternative investments, this crowdfunding company is a good choice. You can buy shares in various industries, including real estate, legal, and art. However, it’s more suited to accredited investors.
5. Vacation home rentals
Fractional ownership of a vacation property is a way to diversify your portfolio. Buying a portion of a vacation home gives you the benefits of ownership with access to a vacation home. You get access to the property for a specific number of weeks each year.
Fractional ownership of vacation properties shouldn’t be confused with timeshares. When investing, you own a portion of the property’s equity and become a co-owner. Unlike timeshare properties, you can sell your fractional ownership, gift it, or place it in a trust. Additionally, you can stay in your luxury resort vacation home or rent it out when you don’t use it.
6. Tokenized real estate
Real estate tokenization allows for fractionalized property ownership using blockchain technology. Several real estate platforms offer property tokens representing part of an investment property. Investors can purchase property tokens, taking on partial ownership for as much or as little as they can afford.
Benefits of tokenized real estate assets include:
- Low minimum requirements
- Better liquidity
- Access to global markets
- Investment opportunities for small-scale investors
That said, tokenized real estate investing can be more volatile and suffer from a lack of transparency.
7. Real estate exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) can make investing in fractional ownership properties easier. These funds are typically invested in REITs and traded like stocks and bonds. ETFs aim to replicate performances in a specific real estate index or sector.
Investing in ETFs has diversification benefits. For example, if you invest in several companies that own investment properties, this reduces risk. Additionally, dividend payouts tend to be high, and you benefit from increased liquidity. However, interest rates can affect the performance of ETFs.
Benefits of Fractional Real Estate Investing
Fractional real estate investing can give you easy entry into property markets. With minimal upfront costs, partial ownership of vacation properties can be within your reach.
Here are five benefits of fractional investing:
1. Lower barrier to entry: If you have limited funds, fractionalization lets you enjoy the benefits of property ownership. Purchasing fractional shares is more affordable than buying an entire rental property.
2. Diversified real estate portfolio: It is easier to diversify your investment portfolios by owning fractions of multiple properties. This gives you access to various markets and property types. Additionally, spreading investments across multiple properties reduces risk compared to investing in a single property.
3. Increased liquidity: Online investment platforms generally let you buy and sell fractional shares. This allows you easier access to cash and more flexibility than traditional property investments.
4. Professional management: Fractional ownership eliminates the day-to-day stress of managing rental properties. You don’t need to screen tenants, deal with maintenance issues, or lose rental income from vacancies.
5. Earn passive income: Fractional ownership in rental markets lets you earn regular income from rent payments. Additionally, you benefit from potential property appreciation when the asset is sold.
Risks & Considerations
Like any type of investment, fractional real estate investing has some risks. For example, you have less control over assets and investment strategies. And real estate markets can fluctuate.
Here are some risk considerations before starting in fractional property investing:
- Housing market risks: Investing in fractional ownership properties is subject to market risks. Factors affecting the performance of real estate investments include:
- Fluctuations in property values
- Market demand
- Rental income
- Economic conditions
- Lack of control: Fractional real estate ownership means you share control with several other investors. While being a passive investor is attractive to some, it’s not ideal if you want control over decisions. The more stakeholders, the less say you have in property management and investment strategies.
- Potential conflicts: Partial ownership of properties means you will probably deal with unknown co-owners. This situation can result in conflicts regarding financing, maintenance, and exit strategies.
- Lower returns: Returns may be lower than traditional real estate investing. Property management and crowdfunding companies can charge fees. Also, you must share returns among multiple investors.
- Limited exit strategies: Not all investing platforms offer liquidity options, and you may face heavy fees if you want to exit before a certain time. Also, selling fractional shares through secondary markets may have associated costs and complexities.
Who Benefits from Fractional Real Estate Investing?
Buying fractional property ownership may or may not be your best strategy, depending on your financial goals.
Typically, investing in fractional properties suits the following investors:
- Individual investors with limited capital: You can get started in real estate with limited financial resources.
- Beginner real estate investors: These investors can enter the real estate market with smaller investments and less experience in property management.
- Diversify your portfolio: Do you want a diversified portfolio? If so, you can spread investments across different properties and locations.
- Passive investors: Earn regular income from rental units without stressing about property ownership.
- Access to luxury properties: Get a foothold in the luxury property market and own part of high-value real estate or a luxury resort vacation home.
Fractional real estate investing can be an excellent investment strategy. This is especially true if you want to enter the property market with limited cash. Investing in a portion of an investment property rather than buying the entire property is more affordable. You can benefit from increased liquidity and professional management, and earn passive income through rental payments.
Before venturing into fractional real estate investment, it’s vital to consider your long-term financial goals and risk tolerance. Consider the pros and cons of fractional ownership of properties. That way, you can make informed decisions as you start your journey to build wealth.
Invest passively with syndications
Want to invest in real estate but don’t have the time? No matter your level of experience, real estate syndications provide an avenue to invest in real estate without tenants, toilets, or trash—and this comprehensive guide will teach you how to invest in these opportunities the right way.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.