Investing in real estate can seem daunting, especially in today’s real estate market, requiring substantial time and tens of thousands of dollars to get into the game. You might be considering buying just a share of a property but don’t know how to invest in fractional real estate.
The idea of owning just one part of a property might seem bewildering. If so, never fear. This article will walk you through how to invest in fractional real estate.
What Is Fractional Real Estate?
Fractional real estate investing allows you to pool your money with others to buy property, with each investor owning a share. While you own just a piece, you still get all the benefits. Of course, that also means you get all the costs and responsibilities associated with property ownership.
A smaller share of a piece of real estate means smaller returns, but it also means less time and money to maintain and manage the property. Your fractional real estate investment will most likely be overseen by someone else, providing you with passive income, appreciation or both, depending on your investment goals.
Consider these advantages:
- Lower barrier to entry: Investments can be as low as $100 or less.
- Opportunity for diversification: You can spread investments across properties.
- Passive income: Someone else manages the property.
Fractional ownership in real estate has its downsides, too. You have less control over managing and maintaining the property, and management and transaction fees may affect your returns.
This is vastly different from traditional real estate investing, where you buy an entire property to use or rent to others. Traditional real estate investing typically requires a lot of capital upfront. You also have complete control over the property, including paying for management, maintenance, repairs and property taxes.
Direct ownership provides you the potential for higher returns, tax advantages and leverage for a loan. You also have an asset that can be sold.
Fractional home ownership gives you the chance to invest in rental or vacation homes that might otherwise be out of your reach.
5 Steps for How to Invest in Fractional Real Estate
When you’re ready to start, here’s how to invest in fractional real estate.
Step 1: Define Your Investment Goals
Advanced technology and online platforms make fractional real estate investing easier, but they don’t change the tenets of investing. When eying an investment, determine your investment goals: Are they short or long term?
Are you looking to generate income from a rental property (a short-term strategy), or do you want to hold onto the property, let it appreciate over the years and then sell (a long-term strategy)? Of course, you can pursue an income-generating property to sell later.
Step 2: Choose an Investment Platform
The number of platforms for fractional real estate investing is growing, and not all platforms are created equal. Researching platforms can go a long way toward avoiding a regrettable experience venturing into investing in real estate. You want to put your money in the hands of an established company with a good reputation. Arrived and Groundfloor are two of the top platforms with stellar reputations.
Other factors to consider are the fees charged by a platform, the minimum investment required and the type of properties offered. The returns you seek, the capital you have to invest and how you plan to use the property can inform your decision on a platform.
Step 3: Research and Analyze Properties
You’re not buying an entire property with fractional real estate investing, but you still must research the location, market trends and vacancy rates for potential growth and analyze historical performance, rental income and more for potential return on investment.
Step 4: Understand the Legal and Financial Aspects
Joint ownership of real estate can come in many forms. The ownership structure makes a difference in your rights as an investor and whether you have personal financial liability.
Here are four common ownership structures you may see with a fractional real estate investment:
- Tenancy in common: Each owner holds a property deed.
- Joint tenancy: Each owner holds an equal share.
- Limited liability company: A company owns and operates the property.
- Limited partnership: A sponsor manages the property and others invest.
Other legal and financial aspects to understand include tax implications.
On one hand, you may be able to deduct a portion of property taxes, mortgage interest and depreciation based on your share of the property. On the other hand, the rental income you collect will be taxed under standard income tax rules, and you may owe capital gains taxes if you make a profit selling, based on your location and how long you held the property.
Step 5: Make Your Investment and Monitor Performance
Buy real estate that fits your goals and stay on top of what’s going on with your property. Monitor your property’s performance, watch for market trends and stay on top of regulations that might impact your real estate investment. If investors or the platform hold a meeting, participate to stay engaged in the management of your property.
Consider reinvesting the profits from your investment to increase the amount of real estate you’re holding. Then, plan your exit strategy for how and when you will sell your real estate. Before you invest, understand how a platform allows you to liquidate your position.
Types of Fractional Real Estate Investments
With the lower barrier to entry, fractional real estate investing can help you own real estate you might have once considered out of your reach. The properties you can purchase include residential and vacation homes, multifamily apartment buildings, office buildings and retail outlets, warehouses, factories and more.
Decide Whether a Fractional Real Estate Investment Is for You
Fractional real estate investing opens the market to investors with limited capital and can provide passive income without the hassle of maintaining and managing a property.
Now that you know how to invest in fractional real estate, consider whether it is a good investment.
Frequently Asked Questions
Is fractional real estate a good investment?
Historically, investing in real estate has set the foundation for building wealth but has largely been accessible only to high-net-worth individuals. Fractional real estate investing allows many investors to participate in the real estate market without a huge upfront capital outlay.
Can you buy fractional shares of real estate?
Buying fractional real estate shares is easier now than ever because of fractional ownership real estate platforms. Depending on the platform, you may get different services. Still, these online platforms allow you to purchase a share of a property instead of the entire asset, lowering your barrier to entry.
How do I start fractional investing?
Fractional real estate investing requires a little effort, but here are the steps to take: define your investment goals – short or long term – to seek rental income or appreciation, research the market and properties, review and select an online platform, buy into a property and monitor the performance of your investment.