Real estate can be a powerful addition to a diversified portfolio, offering the potential for steady cash flow, long-term appreciation, and multiple tax advantages. However, for many new investors, the price of admission can feel too high, and the responsibility of being a landlord can be too cumbersome.
Fortunately, there’s a way to add real estate into your investment strategy without large amounts of cash and time commitment. It’s called fractional real estate investing.
What is fractional real estate investing?
Fractional real estate is an investment structure that allows you to buy a portion of a home or commercial property instead of the entire property. Think of it as a crowdfunding model: a group of real estate investors purchase shares in an apartment building, an industrial complex, or a vacation rental and split not only the cost, but the profits.
Fractional ownership is not a new investment strategy, though you’re more likely to have heard of it in reference to asset classes such as private planes or jet ownership than in real estate. With private air travel, it made sense for businesses to purchase shares in a private jet that they’d use only part-time. With part ownership came a reduction in costs. Each co-owner would pay their percentage share of the cost of maintaining and flying the plane, and only use it when needed.
The fractional ownership model also finds a place in the stock market, where some brokers allow you to buy high-priced stocks, such as Amazon and Tesla, for a percentage of the price, thereby giving you a percentage of ownership. This makes them more accessible and easier to buy. With fractional-share trading, the amount of money you invest will determine what percentage of a share you can afford to buy. Instead of investing in a single stock, fractional-share trading allows you to start small, diversify quickly, and see returns sooner. The same principle applies to fractional real estate investing.
Until recently, buying Class-A commercial real estate, luxury resort vacation homes, or single-family dwellings in sought-after neighborhoods was only available to accredited investors or those with deep pockets. Fractional ownership allows individuals to access the benefits of long-term real estate investments with a smaller upfront investment. As the property value grows, so does each investor’s share of the returns.
Is fractional ownership a good investment?
If you don’t have a massive amount of cash to invest or the time to find, purchase, and maintain a rental property, then fractional real estate ownership can be a great investment opportunity. It has all the benefits of property ownership without the hassle of property management. Here’s why:
Low barrier to entry
With fractional ownership, you don’t need a large down payment or perfect credit to enter the real estate market. You can purchase shares of the property for a small amount and add more as your available funds increase. The transaction costs for a fractional transaction are also typically lower.
Further, with a management company handling both the purchase and the financing of the property, you can confidently rely on their expertise and get started without the need for extensive research and learning.
Access to better properties and areas
The type of homes and properties you can buy is often capped by your available funds. With a fractional real estate investment, however, you can invest in much larger homes and vacation properties you may not otherwise have had access to.
With a $200,000 investment, for instance, you could buy a single-family home or fractional shares in a larger multifamily commercial property in a better part of town, with a higher rental income and the potential for higher returns.
Low overhead and time investment
One of the most significant advantages of fractional real estate is that it allows you to earn rental income with minimal time investment. No more landlord responsibilities and headaches. You’re sharing the costs of upkeep and taxes with other fractional owners, and the management company takes care of all the administrative—from the selection, purchase, and renovation of the home, to the day-to-day responsibilities like finding renters, dealing with repairs, and managing expenses.
Fractional ownership also enables smooth exits and the potential for increased liquidity. When it comes time to sell, fractional ownership can offer more flexibility than selling an entire property. Depending on the platform, you may have options to liquidate your shares without the hassle of listing, staging, or negotiating a full real estate sale.
Diversification opportunities
Fractional ownership allows you to diversify your real estate portfolio and mitigate risk without a lot of capital. This creates a huge amount of flexibility, giving you the option to invest in different locations, property types, and markets. Especially for new investors, it allows for a level of experimentation and risk management that is not possible with single-owner investments.
Passive income
Real estate investing isn’t always entirely passive, especially when you’re letting out single family homes that require upkeep and repair. The rental income from a fractional real estate investment is truly passive because it requires no time or energy investment from you. It can provide a reliable source of monthly passive income, as well as capital appreciation, without requiring you to do the upkeep.
How fractional real estate investing works
When you decide to invest in a real estate asset as a fractional investor, you pool your resources with a group of people to share ownership. Unlike timeshares, where you’d buy a certain amount of time in a vacation home without any ownership rights, with fractional ownership, you have the rights to sell, gift, and inherit the property, as well as place it in a trust. Here’s how it works.
1. Purchase
To facilitate the purchase of a property, a special-purpose vehicle, such as a Limited Liability Company (LLC) or a Limited Liability Partnership (LLP), is established for you, often by the investing platform. You then become the co-owner of the real estate property and share the benefits of ownership in proportion to the percentage of shares you own. Since the cost of entry is low with fractional real estate, you’ll rarely need a loan or financing to purchase.
Arrived makes it easy to buy shares of rental properties and begin your real estate investing journey. You can sign up in minutes and start investing today.
2. Maintenance
A property management company handles the overall management and upkeep of the property, and the costs for this are split proportionally between the owners. The management company will typically handle the maintenance, upkeep, and repairs of the property, as well as finding tenants and drafting contracts.
3. Sale
While fractional real estate, much like any other real estate asset, is a long-term investment, Arrived offers options for early liquidity.
Investors typically hold shares until the property is sold. However, select funds offer quarterly redemptions, and a secondary market for property shares is in development, with an expected launch in 2025.
Fractional ownership vs REITs
Another common form of real estate investing is through real estate investment trusts (REITs). A REIT is a public company that purchases and leases out real estate assets, such as rental homes, apartment buildings, shopping centers, or warehouses, by selling shares of stock or issuing bonds. A REIT will distribute its earnings to investors in the form of dividends. There are a few key differences between fractional ownership and REITs:
Ownership:
As a fractional real estate investor, you own the property that you’ve invested in. You can, therefore, transfer ownership with no restrictions. This is not so with REITs, where you’re purchasing a security in a company that owns real estate.
Arrived takes a different approach. Unlike traditional fractional ownership platforms, Arrived allows individuals to purchase shares in fully managed rental homes for as little as $100. Investors can choose specific properties, combining the transparency of direct ownership with the oversight and potential liquidity of a public offering.
Property types:
Fractional ownership can offer more choices in terms of the type of real estate and alternative investments. A REIT portfolio must have 80% of its holdings in pre-existing income-generating properties. There are no such limitations on fractional investments. As an investor, you have full choice and control over which properties you decide to invest in. With a REIT, the property management team creates the portfolio of properties.
Volatility:
REITS can be privately or publicly traded, and you can buy and sell shares of publicly traded REIT stock through a brokerage account. While this makes REITs more liquid than fractional investments, it also makes them more volatile due to their correlation with the stock market.
Easily invest in rental homes
Whether you have $100, $1,000, or $10,000 to invest, fractional asset ownership can be a great way to get started in real estate without a significant investment, enabling you to invest in properties that would otherwise have been out of your financial range.
Plus, with no landlord duties, you reap the benefits of property ownership and passive income without the time spent on upkeep and management.
At Arrived, we give you access to top homes based on investment potential and make getting started in real estate as easy as possible.
Browse available properties and sign up to start building your real estate investment portfolio.
