Investing in real estate is a great way to earn passive income and build wealth. However, you need a lot of upfront capital to start. Unfortunately, not everyone readily has the cash to buy a home, make renovations and repairs, and rent it out. Luckily, there are other solutions, like fractional real estate investing. If you want to learn more, read along as we go over the pros and cons and how fractional real estate investing works.
Contents of This Article:
- What Is Fractional Real Estate Investing and How Does It Work?
- Personal Properties vs. Commercial Real Estate
- Fractional Investing and Private Equity
- Pros and Cons of Fractional Investing
- Who Is Fractional Real Estate Investing Right For?
- Platforms You Can Use for Fractional Investing
- Manage Your Investments with Bay Property Management
What Is Fractional Real Estate Investing and How Does It Work?
Fractional real estate investing is when you own a fraction or portion of real estate split among several investors, sort of like crowdfunding. You get all the same benefits of owning the property yourself, but you don’t have to worry about expenses, management, or other investing factors.
There are several ways you can buy a portion of a home or property, depending on the investors or organization you go with. For instance, you could get a deed and equity in a property or buy shares in a property. In that case, it’s pretty simple for investors since the property is managed by a management firm already.
One example of fractional real estate investing is when a company buys a commercial or residential piece of real estate. Then, they divide the cost of the property into fractional shares and sell them to investors. If you invest in the property, then you get a percentage of the cash flow from the rent payments.
It’s essential to recognize that the fractional ownership model is not the same for personal and commercial properties. Next, let’s go over the differences between the two.
Personal Properties vs. Commercial Real Estate
Generally, when it comes to fractional ownership of personal properties, it’s a vacation home. In this case, each owner gets time or space occupancy. So, if you own part of a vacation rental, you may have a certain amount of time each year to stay there and use the property. Then, other investors will also have the same amount of time to use it. Everyone wins since you all get time in the property and benefit from the property’s appreciation.
When it comes to commercial properties, fractional ownership looks a little different. Usually, owners don’t get any time occupancy. So, instead of getting personal access to the property, you’ll have access to a certain amount of the rent payments, whether it’s weekly, monthly, or quarterly.
Fractional Investing and Private Equity
As stated earlier, fractional investing options can include private equity. With a private equity investment, an LLC will buy a commercial property and raise equity by allowing investors to purchase shares. Then, all the investors earn rental income and get profits when the property eventually sells.
Another standard fractional ownership method is Real Estate Investment Trusts (REITs). These companies own several properties and sell shares of their company to investors. If you go this route, you’ll get access to profits from all of the properties owned by the REIT.
Now that we’ve gone over a few options and how they work, let’s discuss the pros and cons of fractional real estate investing.
Pros and Cons of Fractional Investing
Any investment method comes with a few pros and cons. After all, it can be hard to avoid risk with any investment. Here are the pros and cons of fractional real estate investing.
Benefits of Fractional Investing
- Low Barrier to Entry- One of the benefits of fractional investing is the lower barrier to entry. Since you’re investing with others, the down payment is split between all investors.
- Passive Income- Like most real estate investments, you get the benefit of passive income without actively working to earn it.
- Higher Value Properties- If you’re going in with others on an investment, your budget is larger than it would be if you were investing alone.
- Access to Competitive Markets- WIth access to higher-value properties, you’re looking at more competitive markets. In other words, fractional investing gives you access to higher returns.
- You’re Not Alone- Since you’re not investing alone, you don’t have to attend to all of the responsibilities personally. Additionally, you’re sharing the risk with other investors.
Drawbacks of Fractional Investing
- Lack of Control- When you buy your own property, you can decide what’s best for you. However, when you share real estate with other investors, you lose a bit of control.
- Long Commitment Period- Some fractional ownership companies require a timeline of 5 to 10 years before you can liquidate your shares.
- Extra Fees- Depending on your investment, you may experience additional fees. For instance, each fractional ownership company has its own fee structure. So, make sure you know what costs you’re responsible for.
- Accredited Investors- While some fractional investing companies are open to all investors, some require investors to be accredited.
- Research Required- You can’t get away with a fractional investment without research. You’ll want to know the risks and costs of the property.
Who Is Fractional Real Estate Investing Right For?
Fractional investing isn’t necessarily suitable for everyone. After all, it depends on your investment goals and expectations. For instance, if you’re looking for a primary property to live in, fractional investing probably isn’t the right way to do it.
Conversely, fractional real estate investing is good for individuals looking to break into the industry. If you don’t have that much experience or cash to put toward a large investment, fractional investing could be beneficial.
Additionally, fractional investing could be great for those who don’t have time to manage their properties. You can rely on Northern Virginia property managers to take care of your investment properties while you sit back and earn rental income.
Finally, you may consider fractional real estate investing if you want to expand and diversify your investment portfolio. Experienced investors know how important it is to have a diverse portfolio and several types of investments.
Platforms You Can Use for Fractional Investing
If you’re thinking about fractional real estate ownership, there are several platforms and investment opportunities out there. Here are some of the most popular companies that people use for their investments.
If you’re looking for an easy way to get started with fractional real estate investing, Fundrise is one of the top options. They have a $10 minimum requirement and extremely low management fees. Additionally, they allow non-accredited investors to invest in fractional ownership of residential or commercial properties. Furthermore, if you want to sell your shares early, there’s no penalty.
Another platform that’s open to everyone, not just accredited investors, is Concreit. You can start investing with as little as $1, and they offer non-traded REITs to help you invest. Most investments are for commercial properties that earn larger profits, allowing you to earn an income.
HappyNest is a crowdfunding company that specializes in commercial real estate. Their technique involves purchasing commercial buildings and renting them to large companies to generate income for investors. You can start with just $10 and manage your investment with their simple mobile app.
Manage Your Investments with Bay Property Management
One of the most important aspects of fractional real estate investing is finding reliable management for your properties. After all, when you own fractional real estate, you’re not personally responsible for maintaining the property. Instead, you’ll have a property management company to cover all maintenance and rental needs.
Bay Property Management Group offers comprehensive rental management services for investors who don’t have time to manage each of their properties. We can help with rental registration, tenant screening, maintenance, rent collection, and more. Contact BMG today if you need management services in Baltimore, Philadelphia, Northern Virginia, or Washington, DC.