A Beginners Guide To Fractionalized Commercial Real Estate Investing

Whether you’re a novice investor or a professional financier, you’re probably feeling the current impacts of an extremely volatile stock market, coupled with the effects of rising inflation. This has created a new wave of individuals flocking to different investment classes, one of which is commercial real estate (CRE), as it’s well known for its steady returns and growth potential.

For a newbie investor without large amounts of upfront capital, what can you stand to gain from investing in CRE? What are some of the potential risks, and once you’re convinced it’s a smart alternative asset to explore, how can you throw your hat in the ring? 

What is Fractionalized Real Estate?

Fractionalized real estate is when a company buys a piece of CRE and divides the property's cost into fractional shares, which can then be sold to investors. 

People interested in fractionalized real estate investing have a lot of options to choose between. There are some challenges you'll face no matter what kind of investment you choose, though. If you're looking to begin this process, these are some things to keep in mind:

1. 1. Set your intentions: The first question you should ask yourself is what are you looking to get out of your investment, says Dan Gudema, CTO of BRiX, a new platform entering the fractional real estate market. This is important because there are a number of considerations such as what is your investment time frame, what return you are expecting, how much can you invest, what is your appetite for risk, why are you investing in fractional real estate and other important questions that can influence your decisions. 
   2. Do your research: Fractionalized real estate investments can be a great way to generate passive income and enjoy the benefits of property ownership without having to deal with the financial and logistical headaches that come with it, but it's crucial that you take the time to make sure you're using your money wisely and that the companies you're working with are trustworthy, says Jack Warne, founder of Emerald House Cleaning. You don't want to end up with a property that's not worth enough or is too much of a hassle to maintain.
   3. Audit investment platforms: Make sure you know where your money will be going (and how it will get there) from the start. When looking at different investment companies, ask them exactly what their process will look like from start to finish — you don't want any surprises down the line, Warne says.
   4. Diversify your properties: It's important to remember when you begin investing in fractionalized real estate to diversify as much as possible, rather than trying to cherry pick individual winners, says Brian Davis, real estate investor and founder at SparkRental.com, a company that helps people replace their salary with passive rental income. 

Where can I invest in fractionalized real estate?

One option for investing in fractionalized commercial real estate is through real estate investment trusts, also known as REITs. While these are not a new concept they provide liquid exposure to real estate for new investors, says George Beatty, real estate expert & Founder of Problem Property Pals.

While these are typically the more popular ownership option, they are not enough to meet the financial needs of those looking to capitalize on their investments, according to Beatty. This is because the choice of traded-REITs and its exposure to residential real estate is limited.

“I would advise investors, who are looking to invest in fractionalized real estate, to use fractional investment models and platforms. These platforms can help investors find quality assets and partners, to co-invest in properties alongside them,” says Jason Ault, a real estate expert and consultant.

One option for fractionalized investing is the novel tokenized commercial real estate platform AKRU.

AKRU, which was founded in 2018 with the objective of democratizing real estate through tokenization, streamlines the process of investing in commercial real estate for beginners. Its intuitive platform — which is expected to open up to the public for investing soon — is an option for new investors as it has a low barrier to entry, allowing for investments as small as $1,000, and is extremely user friendly.

Benefits of Fractionalized Real Estate Investing

Owning fractionalized assets is an excellent way to make money in real estate without necessarily having access to a large sum of cash, says Warne.

“One of the best things about this type of real estate investment is the speed with which you may begin earning profits. Because the properties are already built, there is no need to wait for construction or renovation work to be completed,” he says. “This means that there is the potential to start reaping the benefits of your investment almost immediately after signing on the dotted line.”

Some other benefits include tax deductions, property appreciation potential, and low maintenance costs, Warne notes. While it's true that you're never going to get as much financial benefit out of fractional ownership as you would receive if you were a full owner, it's also true that there is still the possibility that tax advantages may make up for some of the lost earnings potential. 

Parting Thoughts

With a bear market driving investor concerns in traditional stocks, novice investors looking for affordable alternative assets to supplement their investment portfolios now have a wider array to choose from. The commercial real estate asset class is no longer solely available to institutions or the uber-wealthy. Smaller investors are finally able to gain entry to CRE thanks to new fractionalized real estate platforms. 

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