The pros and cons of fractional real estate ownership

You’ve heard of timeshares, right? Shared holiday homes where you buy just a slice of the property…

Well, fractional real estate takes that idea and turbocharges it. We’re talking about high-end property investment in prime locations with the opportunity to own a fragment of a multimillion-dollar asset. Sounds too good to be true? It just might be.

There are several benefits and downsides of fractional real estate ownership, and it’s important to evaluate both sides for a sound investment decision. Let’s begin by outlining what this property investment strategy is all about.

What is fractional real estate ownership?

Fractional property ownership is an investment approach where multiple investors share ownership of a single property. Instead of buying an entire property, investors purchase a percentage of the asset. This allows more people to invest in real estate and gain the benefits of property ownership.

For many, the opportunity to invest in real estate with a lower barrier to entry makes fractional ownership an attractive option. This property investment strategy has several other benefits, as we’ll see below!

Pros of fractional real estate investing

Fractional real estate investing offers many advantages that make it an attractive investment option for many, including:

  • Lower cost of entry
  • Shared responsibilities
  • Diversification of investment
  • An increase in leverage
  • A source of passive income

1. Lower cost of entry

Rather than paying the full purchase price for a property, you pay only for the percentage you want to own as a fractional owner. This can make real estate investing accessible to those with less capital. If a property costs £500,000 and you buy a 25% share, your initial investment is only £125,000 instead of the full £500,000.

2. Shared responsibilities

With fractional real estate ownership, property management tasks are distributed among owners. Things like maintenance, taxes, insurance, and repairs are divided based on ownership percentages. This can save individual owners time and money compared to sole ownership of an investment property. However, it also means you have to rely on other owners to fulfil their obligations — if they fail to do so, it could negatively impact the value of your investment.

3. Diversification of investment

Rather than sinking all your money into a single property, you can invest in multiple properties across various locations and sectors as a means to reduce risk. If one property declines in value, the others may remain profitable or even increase in value.

4. An increase in leverage

When you buy a fraction of a property, you’re using other people’s money for the remaining portion. This allows you to magnify your returns, though it does come with more risk. The key is choosing a leverage level you’re comfortable with.

5. A Source of passive income

If you invest in a property with strong rental demand, you’ll earn a share of the rental income each month without having to deal with tenant issues or day-to-day management. You can easily hand over the property to a property management company while sharing the financial burdens with your co-owners.
While fractional real estate ownership has many benefits, there are some downsides to be aware of. Read on to discover them for a more informed investment decision!

Cons of fractional real estate investments

Below are some of the disadvantages of owning a fractional share of an investment property:

  • Less control
  • Difficulty of selling

1. Less control

Fractional property owners have restricted control over decisions made about the asset. Depending on the fractional ownership agreement, your voting right is mostly limited to how much stake you own in the property. The majority of owners or property managers will make the key choices regarding the property, like tenant selection, maintenance, and upgrades. You have to go along with what they decide, even if you disagree with it.

2. Difficulty of selling

When the time comes to sell your fractional share, finding a suitable buyer interested in your share may be time-consuming. You’ll need to find a buyer interested in that specific property and the exact share size you want to sell. Given the complexities involved, your share may sell for less than expected. It also means your share could take longer to sell, during which time you’re still responsible for maintenance fees and other costs.

While fractional investing offers some attractive benefits, like lower upfront costs and diversification, it’s important to weigh the downsides before investing. Make sure you fully understand all the fees involved and have realistic expectations about your level of control and ability to sell in the future. If you’re not satisfied with the options available to you, you may consider some of the alternatives outlined below.

Other alternative real estate investment options

Fractional real estate ownership is not your only investment option; several other profitable approaches exist, such as:

  • Real estate investment trust (REIT)
  • Real estate syndication
  • Real estate crowdfunding

1. Real estate investment trust (REIT)

While fractional property investment involves direct collaboration with other investors for specific property management, real estate investment trusts (REITs) allow you to purchase shares in a company that owns diversified property investment portfolios. This means less hands-on involvement and not having to manage the property or vet partners, as REITs are managed by professionals.

Shareholders in a REIT earn income from the trust’s real estate investments without the complexities of direct ownership or partnership agreements, making it an appealing option for those looking for more passive investment in the real estate market.

2. Real estate syndication

This alternative real estate investment option involves pooling money from multiple accredited investors to invest in property. Typically, a sponsor will source the deal and manage the investment, while passive investors provide most of the capital. The sponsor earns fees and a share of profits for managing the investment.

For investors, real estate syndication provides the opportunity to invest in large-scale properties that would otherwise be difficult to access. However, investors have little control or say in how the property is operated.

3. Real estate crowdfunding

In real estate crowdfunding, investors pool money through an online platform to fund real estate projects. You can invest in debt or equity crowdfunding deals, including residential, commercial, and mixed-use properties, making it a great way to diversify your property investment portfolio.

While this investment strategy provides investors with passive income and cash flow, it does come with risks like lack of liquidity, transparency, and control. For smaller investors, though, real estate crowdfunding provides an accessible way to invest in real estate assets that are usually available to the very wealthy.

In summary, alternative real estate investments like REITs, syndication, and crowdfunding allow investors to tap into the lucrative real estate market in accessible ways. However, make sure you understand all the risks and responsibilities involved before investing. Do your due diligence to find the option that matches your investment goals. With the proper precautions taken, these alternative real estate investments are worth considering for your portfolio.

Frequently asked questions

Can you invest in fractional real estate?

Yes, you can invest in fractional real estate, where you buy shares in a property fund that owns commercial or residential properties. This is similar to purchasing stock shares in a company, allowing for real estate investment without buying a whole property.

Who would benefit from fractional ownership?

Fractional ownership is beneficial for individuals seeking to own property without the full financial burden. It’s particularly beneficial for singles and budget-conscious investors who want the perks of ownership while sharing costs with others, making property investment more accessible and manageable.

What is the difference between a REIT and a fractional ownership?

The difference between a REIT and fractional ownership is that while the former involves buying shares in a company that owns, operates, or finances a diverse portfolio of real estate properties, the latter has to do with directly owning a part of a specific asset. Thus, REITs offer a more indirect form of investment in the real estate market.

Is fractional ownership risky?

As with all investments, fractional ownership carries some risk. However, concerns like lack of control are often mitigated by professional management, which ensures fractional owners have a say in significant property decisions. The shared ownership model can also spread risk among multiple investors.

Fractional real estate ownership: things to remember

  • Fractional real estate ownership is a low-barrier entry into the real estate market. It allows you to jointly own a property with other investors with less capital.
  • Before diving into fractional ownership, make sure you understand exactly what it means and all the details of the specific property.
  • In addition to your initial investment, you’ll be responsible for ongoing property maintenance fees. Before purchasing a share, make sure these additional costs fit your budget.
  • Once you decide to move forward with a purchase, review all fractional ownership agreements very carefully before signing.
  • Understand all details regarding the use of the property, scheduling, responsibilities for maintenance and repairs, fees, and any limits on reselling your share.
  • While you hope to enjoy your fractional ownership for years to come, it’s wise to consider how you might sell your share down the road.
  • If you’re not satisfied with fractional ownership or need other low-barrier alternatives, consider REITs and crowdfunding.

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