Fractional real estate investing is a hot topic in the housing market right now. It’s being promoted as a way for ordinary people to get into the real estate game and make money.
But before you take your small business owner hat off and put on your house flipper hat, you should know all that there is about fractional real estate investing. You have to have an idea at least of what fractional real estate investing is and how it does work.
What is Fractional Real Estate Investing?
Fractional Real Estate Investment enables you to buy a portion of a property, so you get all the benefits of owning a property without the upfront expense and managing it.
Fractional Real Estate Investing is a great opportunity for anyone to start a new business venture without having to purchase the entire property. It allows someone who has a relatively small amount of cash but still wants to invest in real estate to do so. There are many different ways to go about this type of investment, and there are many opportunities available in today’s market.
How it Works
Let’s say a company purchases a piece of property that it believes will grow in value over time. Then it divides the cost of the property into shares. These shares are then sold to investors. Investors receive income from rent charged on the property and can also get capital returns on the property when it is sold or they sell their shares.
The cost of the shares will rise as the property’s value grows. Some investors can take on the role of the developer and build the property themselves while collecting rent from other investors and homeowners. Others may buy into properties that others have built and begin receiving rental income immediately after purchase.
And some fractional real estate investing techniques includes things like selling your share at any time if you choose, using it as collateral for other investments or loans, and getting paid handsomely for renting out your share.
6 Steps Guide
Here is a 6 steps practical example of how fractional real estate investment works.
- Sign up to a fractional investment platform like CoVESTA or BrickX.
- Take a view on the properties available on the platform.
- Select a property and choose an amount you want to invest.
- Once selected you can monitor the performance of your property shares.
- You receive a portion of rental income based on how much of the property you own.
- You can keep your shares or sell them as the value of the property grows.
Pros and Cons of Fractional Real Estate Investing
Fractional real estate investing comes with lots of benefits and some drawbacks. So, it is best to make a careful evaluation of this investment before diving in.
In fractional real estate investment, the main sponsor does all of the hard work to maintain the upkeep of the property daily while fractional owners collect passive income in an amount that is proportionate to their ownership share of the LLC. Fractional property investors get all the benefits of property ownership, and without any trouble managing it.
Minimum Entry Barriers
You don’t need to have a hundred thousand dollars to start in fractional real estate investment. Unlike the traditional real estate investment where you will need a couple hundred thousand dollars to buy up land and develop a single property depending on its size, you can start investing with as little as $10.
Allows Easy Diversification
By only buying a fraction of a real estate property, you can easily diversify your investment into several assets, reducing any chances of a poor investment.
Fractional real estate investment allows more liquid and flexible contributions. On some platforms, investors have been able to sell their shares at any time (through secondary markets). However, this flexibility is dependent on the structure and pattern of agreement binding all investments.
In general, fractional real estate investing allows more flexible operation than traditional real estate investment in various spheres. It allows you to engage professionals; hence, saving you avoidable stress like property management and tenant management. Similarly, having lots of investors allows additional ideas, opinions, and contributions.
Less Control Over Properties
Unlike the traditional ownership of real estate assets, fractional investments do not give you total control over affairs. If you invest in a platform, the terms of control are usually set out in any terms and conditions. Platforms generally take full control of the project, and investors may only get a say when something goes wrong.
In most cases, the investment sponsor will require individuals to make a five- or ten-year commitment, during which time they are unable to sell their interest in the deal. This amount of time is required to fully implement a property’s business plan, but maybe too much for some investors.
Market Might Decline
Past performance is no guarantee to the future. Rental rates could change, tenants could default on their lease payment, or they could move out altogether. Working with an experienced sponsor that has a strong track record of success helps to minimize these risks, but doesn’t eliminate them.
Problem With Understanding Terms of Agreement
Especially if you are new to fractional real estate investment. If you are joining a fractional investment platform, understanding the terms and agreeing to it might be a problem for you. Each platform has different terms, and you just want to be as careful as possible. It is recommended that you contact a commercial real estate owner.
For these reasons, each investor must perform their due diligence on the property, platform and sponsor before committing capital. The reason why we will discuss some of the best platforms you can consider.
Platforms You Can Use
There are several platforms through which you can invest in fractional real estate in the US. Here are some of them:
Roofstock is an online platform to invest either in whole or fractional real estate. When it accepts an offer, Roofstock charges a marketplace fee equal to 0.5% of the contract price or $500, whichever is higher. Closing usually takes around 15 days if you are paying cash and 30 days if you finance it.
Being around since 2013, RealtyMogul has become one of the top peer-to-peer lending platforms within the commercial real estate industry in the US. It also acts as an asset and portfolio manager on standalone deals. It has disbursed cash worth over $190M back to its investors. You can invest through this platform with as little as $5K.
For someone who is trying to taste the waters or doesn’t have much investment funds GroundFloor is here for you. Initial investments on this platform can be as low as $10. It has managed to raise over $4M from nearly two thousand investors. Their business model operates on a short-term basis. While this may fetch you quick returns, it may limit your profit potential due to the low timeframe.
As a crowdfunding platform focused on commercial real estate. It provides an opportunity for investors to invest in fractional shares of already developed commercial properties, including office buildings, warehouses, and train stations. One can acquire a property stake with as low as $250. A key benefit of this platform is that you can sell shares unrestricted, avoid holding periods and lengthy development waits.
Being around since its launch in 2014, CrowdStreet has raised over $2B across 500+ real estate deals to its investors since then. 2020 proved to be the most successful year for the company. Individuals invested over $641M on the platform, nearly 3x higher than in 2018. Most of the individual projects and real estate funds available on CrowdStreet require a minimum investment of $25K.
Investment in fractional real estate starts from as low as $10 in the US, $CAD 50 in Canada, and around £1000 in the UK. Fractional ownership of a Grade A property is a great way for a pocket-friendly investment. It can help diversify beyond the volatility of share markets and the low-interest rates on fixed deposits.
Making fractional real estate investment is pretty much easy. All you need is to find a platform that is in line with your interests, and have some money ready to invest. You may be able to buy shares in properties that already exist, or you may have to invest in something new and upcoming.
If you have followed through so far then you have seen why fractional real estate investing makes it easier for lots of investors to go into real estate. It allows investors to pull capital together and buy a real estate asset that would have otherwise been too expensive for an individual.
Each investor makes a financial commitment and the income will be shared according to each commitment.
Fractional investment comes with loads of benefits, including flexibility and passive income and name a few. It also has certain cons, particularly limited control. It is best to make a thorough evaluation of this investment before making any commitment.