Fractional Real Estate Investing: Pros & Cons

Most investment portfolios are likely to benefit from the addition of real estate. In fact, Zillow forecasts that there will be an 11% home value appreciation in 2022. New investors, however, tend to find the entry barrier into real estate investing to be too high, as well as the process of managing the property too cumbersome. The good news is that even if you do not have large amounts of cash, you can still incorporate real estate into your investment strategy through the use of fractional real estate investing.

What is fractional real estate investing?

Do you recall a time when you went out with friends & decided to share a meal & split the cost? That perhaps is the simplest way to explain fractional ownership. More so in the case of real estate where the cost of ownership is significantly high! Essentially fractional investing allows you to split the cost of the asset while you retain either a portion of the ownership or usage rights. 

Timeshares are a great example of a fractional real estate model, even though fractional home ownership isn’t just limited to timeshares. There are a number of online crowd funding platforms that allow you to break into an otherwise expensive real estate model. Essentially, with fractional real estate ownership you can own a small portion of an otherwise expensive real estate project. In some cases, fractional home ownership allows you to stay in the property for a portion of the year while in other cases you simply invest in the property and do not live there.

Needless to mention that fractional real estate investing comes with its own share of pros & cons. Let us look at them in detail.

Pros of Fractional Real Estate Ownership

Removes entry barrier

Breaking into a real estate model typically requires a substantial down payment, not to mention that fact that you need to have good credit. With fractional real estate investing, accessibility is improved since you can get started with a small investment amount. What it also allows you to do is to achieve a diverse real estate portfolio across geographies.

Ensures there isn’t a huge personal risk

Typically the real estate crowd funding sites use leverage or debt as their investment strategy. While for a traditional real estate investor the risk associated with the debt is yours, as a fractional investor you aren’t taking on a personal credit risk. Of course if the investment doesn’t work, you would lose some of the investment. In such a scenario also you will not be accountable for the unpaid debts.

No maintenance hassles

A big advantage also is that you do not need to deal with property maintenance issues, as that is handled by professionals, by way of a property management company.

Diversification of portfolio

If you have so far been investing in the stock market, fractional real estate investing offers an opportunity to diversify your portfolio and generate passive income.

Cons Of Fractionalized Real Estate

Offers low liquidity

Fractionalized real estate investing is not for you if you are looking at a high liquidity option. Especially if the investment is performing poorly, buy back of shares isn’t too common. 

Complications on account of unknown co-owners

Typically with fractionalized investing you are partnering with co-owners you may not know. In case of disputes, this could become an issue. What you also contend with is lack of control where you have little or no say in the direction of the project and you simply need to trust the management company.

Necessitates extensive research

With fractionalized real estate investing you need to undertake  a whole lot of research including but not limited to:

• When are you likely to see profit?
• What are the risks involved?
• Will it be possible for you to reinvest the cash payments that you receive, and more.

While if you are a stock market investor, it is fairly easy to get the required information, fractional real estate investing requires far more work in terms of research.

Accredited Investor

Some companies require the fractional real estate investor to be accredited. Typically an accredited investor is one who has a net worth of $1 million or more or earns $200,000 annually. In such cases your options of fractionalized investments are restricted.

Is fractional ownership a good investment?

Fractional ownership works best for those who are looking at an opportunity to break into real estate investing and who cannot make a large down payment. The key to success is in doing your homework correctly. Asset profile, alignment of interests & real estate experience are some key defining factors. That said, fractional real estate investing offers exciting avenues for investors to explore innovative ways of investing in real estate.