What is Fractional Real Estate Investing?

Fractional real estate investing is a modern twist on traditional property investment that allows individuals to own a share of high-value real estate assets. By pooling resources with other investors, individuals can access markets that may otherwise be out of reach due to high costs and entry barriers. This innovative concept democratizes real estate ownership, enabling individuals to diversify their investment portfolios without the need for large capital outlays.

How Does Fractional Real Estate Investment Work?

So how do you get started with fractional real estate investing? Here are four steps to follow to start purchasing shares of real estate and earning passive income.

• Choose a Platform: First, you’ll want to choose a platform from which you’ll identify opportunities and purchase your shares. Platforms like Fundrise allow investors to purchase shares of real estate for as little as a few dollars. Before choosing, investors should research the platform to ensure it’s reputable.
• Select an Investment: Start browsing investments. Consider how much you’re willing to invest, how many shares you’d like and how it fits into your long-term financial plan. Conduct due diligence and understand how the property generates revenue.
• Purchase Shares: Once you decide on your property, you’ll want to purchase shares. The more shares you purchase, the more passive income you may generate. Don’t invest more than you can afford to part with in liquidity or possible losses.
• Earn Returns: Now that you’ve invested, you can earn passive income from the investment. The more ownership you have, the more you may earn. Even a small fraction of ownership may begin to generate returns.

Benefits of Fractional Real Estate Investing

Before you take on an investment, it’s important to understand its benefits and risks. Here are some ways a shared real estate investment can positively help your portfolio.

Passive Income Generation

Real estate can be a great way to generate passive income. With fractional real estate ownership, you won’t be required to manage the property or act as a landlord. That means you earn income from your investment without lifting a finger. If you buy a small fraction of the property, your passive income may not be much, but you can build your portfolio with time to grow your income.

Potential for Capital Appreciation

In fair market conditions, property values can rise over time. As they rise, investors can get an increasing amount in returns, reflecting the higher value. And if investors decide to sell, they could receive more back than their original investment.

Reduced Risk Through Diversification

One of real estate’s biggest draws is its diversification potential. Diversifying your portfolio across markets helps mitigate risk since separate markets are impacted by different things. For example, if the stock market falls but real estate is still doing well, an investor may be able to offset some of the loss from traditional markets with their other investments. By investing in real estate, investors can balance out their portfolios for a better chance at financial success.

Flexibility and Liquidity

Investing in fractionalized ownership of real estate through a platform makes it easier to buy and sell shares. Investors can easily purchase and sell their shares, similar to how stocks are bought and sold on the market. This benefit gives investors more freedom and flexibility when managing their portfolios. And this level of liquidity is unattainable with traditional real estate investing.

Drawbacks of Fractional Real Estate Investing

Every investment’s benefits are balanced out by its risks. Before investing in fractionalized ownership of real estate, ensure you understand and are okay with these risks.

Potential for Higher Fees and Expenses

With several owners of a property, a property manager or investment manager will need to be hired. Someone will have to maintain the property. If you invest through a platform, you’ll likely have to pay fees to that entity for property management. Before investing, ensure you understand all the associated fees that impact your overall returns.

Potential Liquidity and Exit Challenges

If you purchase shares through a platform, exiting the investment may be easier. But if you go through more private routes, it can be hard to find buyers of your shares when you want to sell. Additionally, if the shareholders want to sell the entire property, this can become a complex and difficult process. It’s harder to liquidate the investment and is dependent on finding a buyer.

Limited Investment Options

Not every piece of property is split into fractional shares. Most properties aren’t. The limited number of opportunities can make it hard to find a good investment property.

Potential for Conflict or Disagreements Among Fractional Owners

Any investment that has multiple owners could lead to occasional disagreements. Every shareholder has their own interests, risk appetites, financial plans and preferences that can make it hard to agree on crucial decisions. Investors should understand that while having multiple shareholders to split the costs is great, there may be conflict around property management.

How to Invest in Fractional Real Estate

One can invest in fractional real estate through fractional ownership models, which allows multiple investors to collectively own a share of an asset, such as real estate, yachts, or fine art. Some of these models are discussed below:

REITs

Investing in fractional real estate through Real Estate Investment Trusts (REITs) is a popular and accessible way for individuals to diversify their investment portfolios and gain exposure to the real estate market without needing to purchase properties outright.

REITs are companies that own, operate, or finance income-producing real estate across various sectors such as residential, commercial, or industrial properties. By investing in REITs, individuals can buy shares of these companies and benefit from rental income, property appreciation, and potential tax advantages.

Crowdfunding Platforms

Crowdfunding platforms offer transparency and convenience to investors by providing detailed insights into the properties being offered for fractional investment. Through these platforms, investors can choose projects that align with their investment goals, risk tolerance, and financial resources.

Investing in fractional real estate through crowdfunding platforms provides a cost-effective and flexible way for individuals to tap into the lucrative real estate market without the burden of managing properties independently. This strategy can help diversify investment portfolios and potentially generate attractive returns, making it a compelling option for both novice and seasoned investors looking to expand their wealth-building opportunities.

Real Estate ETFs

Real estate exchange-traded funds (ETFs) pool together investors' money to invest in a diversified range of properties, providing exposure to both residential and commercial real estate sectors. One of the key advantages of investing in fractional real estate through ETFs is the liquidity it offers compared to traditional real estate investments. Investors can easily buy and sell shares in real estate ETFs on the stock exchange, providing flexibility and quick access to their investment capital.

Additionally, real estate ETFs typically offer attractive dividend yields, providing investors with a passive income stream from the rental income generated by the properties in the ETF portfolio.

Real Estate Syndication

Investing in fractional real estate through real estate syndication offers investors a unique opportunity to diversify their portfolios and enter the real estate market without the need for substantial capital. Real estate syndication involves pooling funds from multiple investors to collectively invest in a real estate project, such as commercial properties, residential developments, or rental units.

One of the key benefits of investing in fractional real estate through syndication is the ability to spread risk across a diversified portfolio of properties. This helps mitigate risks associated with owning a single property and provides investors with exposure to various real estate assets.

Additionally, real estate syndication allows investors to passively participate in real estate investments, as the syndicator or real estate professional manages the property on behalf of the investors. This hands-off approach appeals to investors who seek passive income streams and long-term wealth accumulation through real estate.

Where to Invest in Fractional Real Estate

For Who is Fractional Real Estate Investing Right?

Whether fractional real estate investing is right for you depends on your goals, portfolio and overall financial situation. If one or multiple of these factors apply to you, then a shared real estate investment may be a good addition to your portfolio.

Investors Seeking Diversification in Real Estate

If you’re looking to diversify your portfolio in the real estate market, real estate fractional ownership is a great way to do so. It allows you to expand your investments into different markets, without requiring a huge capital commitment.

Investors With Limited Capital

Real estate is an attractive investment, but not every investor has the money to purchase a property or take out a mortgage. Fractional real estate investments allow investors with limited funds to invest in real estate for a price that fits into their financial situation.

Investors Looking for Passive Real Estate Investment

Some investors want to be hands-on with their property, but others want exposure without the responsibility of managing the property. By having fractional ownership of real estate, investors have access to a more passive investment, meaning they don’t need to be involved in the day-to-day management.

Investors Interested in High-Value Properties

High-value properties like commercial spaces or apartment buildings can provide strong returns, but most investors don’t have the capital to purchase them by themselves. Fractional real estate gives investors ownership of these high-value properties while splitting the costs and fees with other shareholders.

Investors with Limited Time or Expertise in Real Estate

Buying a property, hiring a manager and listing it as a rental can take a lot of time and a bit of expertise. Fractional real estate allows investors with no real estate experience or time to put into the property to have the benefits of ownership. Investors can earn returns without needing to understand the intricacies of the real estate market. However, investors may want to understand some key terms.

Investors Seeking Income Generation and Potential Returns

The potential for passive income is one of the biggest benefits of real estate. Real estate fractional ownership allows investors to get their share of the property’s profits as passive income. And if the property appreciates over time, they may get a strong return on their investment.

Expand Your Portfolio with a Shared Real Estate Investment

If you’ve ever wanted to diversify into real estate but didn’t want the large capital commitment, then fractional real estate investment may be for you. It allows you to gain exposure and passive income from owning a share of a property without needing to worry about its management. Keep in mind, though, that no investment is without risk. But if you are looking for a new investment and can handle the fees, liquidity constraints and other risks, fractional real estate can help expand your portfolio.

Frequently Asked Questions