Real estate is a valuable addition to any investment portfolio, with predictable cash flow, excellent returns, and multiple tax advantages. Zillow forecasts an 11% home value appreciation in 2022 with an estimated 6.35 million home sales, the highest number since 2006.
However, for many new investors, the price of admission can feel too high and the responsibility of being a landlord 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 ownerships 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 will allow you to buy high-priced stocks such as Amazon and Tesla for a percentage of the price, giving you a percentage of the ownership, therefore making 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 is true for 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. But fractional ownership allows individuals to reap the benefits of these long-term investments with a smaller outgo and smaller stake. And as the property value rises, so do each individual investor’s 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’s 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 a share of the property for a small amount and add more as your available funds increase. The transaction costs for a fractional transaction tend to be lower, too.
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 bigger returns. Or in a city like Austin or San Francisco.
Low overhead and time investment
One of the biggest things going for fractional real estate is that it gives you the ability to make rental income with no significant 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 tasks – right 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 allows for smooth exits and higher liquidity. If at any point you decide you’d like to sell your ownership of an investment property, there’s no need for you to endure the hassle of lining up buyers or getting it ready for sale. You simply notify the investing platform and schedule an internal auction for your share.
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.
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 provides a reliable source of monthly passive income as well as capital appreciation without the need for 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.
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 set up 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.
The overall management and upkeep of the property is handled by a property management company, and the costs for this are split proportionally between the owners. The management company will often deal with the maintenance, upkeep, and repairs of the property, as well as finding tenants and drawing up contracts.
While fractional real estate, much like any other real estate asset, is a long-term investment, you are free to sell your shares in a property at any time. Doing so requires a reevaluation of the property value so that your share can be calculated accordingly.
Our goal at Arrived Homes is to make investing in real estate simple and accessible for every single person. Which is why fractional real estate investing with us is a simple, four-step process that you can get started with right away.
Here’s how to do it:
1. Browse through available Arrived homes that are available to new investors and have already been pre-vetted based on their income potential.
2. Decide how much money you want to invest in each home and select shares. You can invest between $100 and $15,000. with Arrived.
3. Review the terms, sign an online contract, and fund the investment by linking your bank account.
4. Collect the share of rental income on your own investment and enjoy your passive investment.
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 apartment buildings, shopping centers, or warehouses, by selling shares of stock or issuing bonds. A REIT will pay out its investors in 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.
- Property types: Fractional ownership offers more choices in terms of the type of real estate and alternative investments. A REIT portfolio must have 80% of its holding 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 publically traded and you can buy and sell shares of publically 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 large investment, enabling you to co-own properties that would otherwise have been out of your financial range. Plus, with no landlord duties, you reap the benefits of property ownership and true passive income without the time spent in upkeep and management.
At Arrived Homes, we give you access to top homes based on investment potential and make getting started in real estate as easy as possible. Browse our listings and sign up to start building your real estate investment portfolio.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice. View Arrived’s disclaimers.