You know what I love most about real estate investing?
There’s so many ways to do it — and experience it’s advantages.
From flipping to landlording, wholesaling and more, you can choose the method that best suits your skills and passions.
But what if you don’t want to get your hands on brick and mortar yourself? Or, what if you’d like to mitigate risk by going into real estate with not just one, but several investing partners?
That’s where fractional real estate investing comes in.
Keep reading to find out if it’s right for you.
What is Fractional Real Estate Investing?
Fractional real estate investing is a model that allows multiple investors to own a single property, essentially the same way that a stock allows multiple people to own a single company.
Make sense?
So, rather than buying an entire building or tract of land outright, you’re buying a percentage of it — one you share with other people buying the same percentage. Each investor becomes a co-owner in the property, and each receives a share of the rental income, appreciation, or other return on investment based on the percentage of the property they own.
That’s where the term “fractional” comes into play.
It’s as if you were buying stock in a company — except here, the “company” happens to be real estate.
This model can be employed for virtually any type of property, from luxury vacation homes and retail space to apartment buildings, enabling investors to gain access to high-priced property without having to pay the entire purchase price upfront.
Advantages of Fractional Real Estate Investing
Fractional real estate investing comes with some appealing perks for investors:
- Lower Initial Costs: You are buying only a fraction of the property, which means you can buy into high-value properties at a fraction of the cost of the full price.
- Diversification: You can spread your investment dollars across many different properties. For example, you could use fractional ownership to buy an interest in an office building, a rental property, or a vacation home without buying them outright.
- Lower Management Headaches: Often, with a fractional property, a third party manages the deal, which means you don’t have to deal with property upkeep, tenant management, or property repairs; you trust a property manager to do that for you.
- Rental Income: Just as with rental property, fractional property can generate rental income. You will receive a share of the rental income according to your percentage of ownership.
- Value Appreciation: As the value of the property goes up, so should the value of your share. Fractional real estate investing offers the chance at value appreciation, especially in areas where property values are on the rise.
Disadvantages of Fractional Real Estate Investing
As with any investment strategy, fractional real estate investing isn’t without its downsides:
- Limited Control: The greatest disadvantage of fractional real estate is that you’re sharing ownership, so you won’t be able to make the final call on any major moves. Other investors (and the managing company) will also have input into what happens.
- Fees and Costs: Management fees, platform fees, and other expenses associated with fractional real estate investing can add up and impact your return, so make sure you account for these in your expected return.
- Liquidity Issues: Real estate is less liquid in general than stocks or bonds, and fractional ownership can be even trickier to sell — there may be a fixed holding period, and selling your stake before that period expires might be penalized or require you to find a buyer first.
- Market Risks: Real estate investment is subject to market risks such as property value fluctuations, unpredictable rental income, and economic downturns.
Fractional Real Estate Example
To further show what fractional real estate investing is, let’s take a look at an example.
Say that you and nine other investors decide to buy a high-end vacation rental property worth $1 million; you each contribute $100,000, which gives each of you 10 percent ownership. A property management company handles the rentals, collects rental revenue, and pays expenses including maintenance costs.
In this fractional real estate deal each of you is a part-owner, and you get 10 percent of the rental income that the property produces.
Got it?
If the property appreciates over time and is sold for a profit, you get 10 percent of that sale value. It’s a way to share in the return of the property without having to buy and manage it yourself.
Fractional Real Estate Platforms: 5 to Consider
Not sure where to begin? Here are five popular fractional real estate investment marketplaces:
- Fundrise: Best for beginners, Fundrise lets you buy fractional shares in various types of properties, such as residential and commercial.
- RealtyMogul: You can pick either equity or debt real estate deals, and invest in a specific piece of real estate or join a REIT.
- Arrived Homes: This alternative investment company focuses on single-family rentals, letting investors buy partially owned shares in rental homes and earn passive income from rents.
- CrowdStreet: Oriented toward commercial real estate, CrowdStreet pairs investors with commercial properties and high-value development projects.
- Yieldstreet: Yieldstreet allows you to buy fractions of a real estate investment or other asset class and diversify across many types of investments.
Each platform has its own transaction fees, minimum investment, and property type — so it’s definitely worth checking out the different platforms to find the best fit for your goals.
How to Get Started with Fractional Real Estate Investing: 5 Steps
If you think fractional real estate investing is right for you and you’d like to add it to your real estate portfolio, here’s how to get started:
- Decide on Your Investment Goals: Are you looking to generate income through rental returns, or aiming for long-term appreciation? Your goals will influence which properties and platforms to choose.
- Research Platforms: Compare different fractional real estate platforms to see which fits your budget, property preferences, and investment appetite best.
- Read the Fine Print: Each platform charges fees and requires a certain level of commitment. Check the fees and ensure you’re comfortable with the costs.
- Select Properties: Once you’ve selected your platform, choose the properties you think will perform best in accordance with your risk tolerance and goals.
- Check in on Your Investments: While fractional real estate investing is typically hands-off, it’s still a good idea to check in regularly. Some platforms provide performance updates, so get familiar with how returns are calculated and see how your investment is performing.
Fractional Real Estate Investing: The Bottom Line
Fractional real estate investing can serve as a vehicle to participate in the real estate market without needing a massive down payment or taking on property management responsibilities. It offers investors a valuable opportunity to diversify portfolios, generate passive income, or explore higher-value properties at a lower cost.
But there are risks — lack of control, fees, and market swings are part of the deal. Do your homework, have a plan, and fractional real estate can be a powerful tool in your investment arsenal, bringing the benefits of real estate to your portfolio.
