Source: Bigger Pockets
Yes, you can own part of a million-dollar property. Today.
While real estate ownership has been one of the most consistent ways to build wealth in America, it has been notoriously difficult to access because of three main barriers: expertise, time, and money.
First, investors will need the expertise to know what markets to invest in and which properties to buy at what price. Once an investor has the expertise, they need time to manage properties, tenants, and taxes. Last, investors need money to make a down payment, which can cost thousands, if not hundreds of thousands of dollars.
Thankfully, fractional real estate investing has considerably lowered the barrier of entry by removing the above factors. In this article, we’ll cover what fractional real estate investing is and why you should consider adding it to your portfolio.
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 of an apartment building, industrial complex, or a vacation rental, and split the costs and profits.
Fractional ownership is not a new investment strategy. You can now buy fractional pieces of many different asset classes, including stocks, classic cars, or million-dollar paintings. This fractional ownership model not only reduces the barriers for anybody to own these asset classes but also allows people to start small, diversify quickly, and see returns sooner. The same is true for fractional real estate investing.
Until recently, buying commercial real estate, luxury vacation homes, or single-family dwellings in sought-after neighborhoods was only available to those with deep pockets. But companies like Arrived have created fractional ownership platforms, allowing individuals to reap the benefits of these long-term investments without the need to have the time, expertise, and money that have traditionally been required.
Top 5 Benefits of Fractional Real Estate Investing
Low barriers to entry
With fractional ownership, you don’t need large down payments or loans 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 or diversify into multiple properties.
Further, with a management company handling the property’s purchase and financing, you can confidently rely on their expertise and get started without the need for extensive research and learning.
No operational headaches
Real estate investing isn’t always passive, especially when scouting for the right property or renting out single-family homes that require upkeep and repair. The rental income from a fractional real estate investment is genuinely passive because it requires no time or energy from you. It provides a reliable source of monthly passive income and capital appreciation without the need for you to manage and maintain the properties you own.
One of the best things about fractional real estate investing is that it allows you to earn rental income and potential appreciation with no significant time investment.
That’s right! No more landlord responsibilities and headaches. The management company takes care of all the administrative tasks from selecting, purchasing, and renovating the home, to the day-to-day responsibilities like finding tenants, dealing with repairs, and managing expenses.
With fractional real estate investing, you don’t have to be a professional investor to gain exposure to the asset class. If you only have a set amount of capital to devote to real estate, you can break up those funds across multiple properties and geographies instead of having to sink it all into a single property. Furthermore, it allows you to invest across geographic locations and property types, amongst other factors, enabling a level of experimentation and risk management that is not possible with single-owner investments.
Distance is no longer a limiting factor
In the past, investors were mostly limited to properties in the markets close to where they lived. Otherwise, managing a property and dealing with its operational issues from a long distance would be a huge pain.
Platforms like Arrived take on all responsibility for the operational tasks and have a local team available. This means that the investor can now pick investment properties in the market that yield the most favorable returns.
Just think, you could own a piece of a single-family home in a desirable suburb with the best schools while also owning a piece of a vacation rental in one of the most popular tourist destinations!
Drawbacks of Fractional Real Estate Investing
While there are numerous advantages to the fractional investing model, we must also consider the drawbacks. First and foremost, since you are one of many investors in a property, you do not have control over the decision-making process.
Whether it’s something small like choosing the paint color for the walls or something big like selling the home. Second, you forfeit the ability to make tax-advantaged moves like a 1031 exchange. Third, while platforms provide access to fractional ownership across the nation, they must be compensated accordingly through fees.
Is the Fractional Ownership Model Right For You?
The fractional ownership model provides access to new investors seeking exposure to the real estate market, as well as seasoned veterans looking to diversify their holdings across the nation. The decision as to whether or not the fractional ownership model is suitable for you depends on your particular situation, and you should not feel a sense of urgency since the asset class is known for its steady growth over the long term.