If you’ve been looking into real estate investing, you may have come across the term “fractional ownership.” Fractional ownership is a growing trend among real estate investors, a shared equity model that allows investors to purchase a portion of a property rather than the entire real estate investment outright. With a smaller cash outlay, investors can own a stake in properties in high-end, luxury, or commercial markets that may otherwise have been out of their reach.
There are a lot of advantages to fractional real estate investing, but there are also some challenges to keep in mind. Here are some fractional ownership pros and cons that will help you decide whether this model is right for you.
What is fractional ownership?
Fractional ownership is an investment structure in which multiple people or entities each buy a portion of a real estate investment, sharing both in the costs of purchase and upkeep as well as the profit. Instead of purchasing an entire property and having to come up with all the money for the purchase, fractional real estate investing allows investors to buy a percentage stake in a property instead.
This model is growing increasingly popular among real estate buyers of all types: from commercial real estate investors to second home buyers, and even those looking to buy vacation homes.
For investors who are new to real estate or have limited knowledge about the market, fractional real estate offers a low barrier to entry. A fractional real estate buyer can start investing in high-value properties in popular markets without putting large amounts of cash down. And as the value of each property rises, so does the investor’s equity and potential return.
The pros and cons of fractional ownership
Fractional real estate is a somewhat new concept and so the pros and cons of fractional ownership are not as widely known or understood as those of whole ownership in traditional real estate. Here are some benefits of becoming a fractional real estate investor, as well as some of the common challenges to keep in mind.
The pros of fractional ownership
Lower barrier to entry
One of the biggest benefits of fractional ownership is the lower barrier to entry, which means that not only can you get into real investing for small sums of money, but you can also invest in higher-priced properties in markets that you may not have otherwise been able to afford.
Consider, if you will, that you have $50,000 to invest in real estate. You could put that money towards a single-family home in a less desirable part of town where rents, and appreciation on the value of the home, will be lower. Or, using the fractional real estate model, you could own part of a luxury home in the most sought-after parts of town. Alternatively, you could purchase a stake in a commercial property that not only commands higher rents, but will likely appreciate more, and faster.
With multiple owners sharing both the costs and the profit, a high-end resort, condominium, residence club, or vacation home becomes available to you without years of saving (and missing out on returns in the meantime). Plus, as a result of being in high demand, these rental properties are unlikely to sit empty for too long, thereby increasing your potential rental income.
If you’re investing through Arrived, you can get started for as little as $100.
One of the major perks of investing in real estate – the potential for passive income – is also available to fractional owners. When you buy a stake in a property as a fractional owner, not only can you build wealth as the value of your property appreciates, but you can also make money from tenants if it is rented out.
Typically, fractional owners pay a real estate management company to take care of all maintenance and administrative tasks, the costs of which are split proportionally between the fractional home buyers, thus ensuring them peace of mind.
As an added bonus, it offers investors flexibility. Since you don’t have to worry about being a landlord, you can invest in fractional ownership properties not just in your local area, but anywhere in the country, enabling you to capitalize on deals in fast-growing markets that may not be at your doorstep. All income generated from fractional ownership, therefore, ends up being passive income, earned through little effort from you.
Further, with a management company handling both the purchase and the financing of the real estate investment, you can rely on their expertise without the need for extensive research and learning on your part.
Fractional ownership is often compared to timeshares, but there are a few key differences between the two real estate models. When you buy fractional ownership in a property, you receive a deed for your portion of the equity, which means that, just like with any other real estate, you have the right to sell, gift, or inherit the property, as well as place it in a trust.
This is not so with timeshares. When you buy a timeshare, you’re paying for usage rights, that is, for a certain amount of time each year for personal use of the property (including your friends and family members). This makes it difficult to resell timeshares and, because of the lack of outright ownership, you do not benefit from appreciation.
The only difference between fractional ownership and single-owner properties is that with fractional ownership, each one of the fractional owners has a certain percentage share of equity according to the ownership agreement. When the value of the property rises, you can sell your portion for a profit and for as long as you own it, if the property is rented out, earn a portion of the rent as passive income.
This shared equity model is what makes fractional ownership of real estate such a good investment to so many retail investors. For a lot less than it would take to buy a property outright, you can purchase shares in single-family homes in big cities, vacation rentals in popular tourist hotspots, and commercial properties only available to accredited investors.
Share the cost of upkeep and taxes
Whether you buy real estate as a fractional owner or through full ownership, you’re responsible for the maintenance of the home, any repairs that need to be done, and taxes to be paid. With shared ownership, the expenses and responsibilities are also shared between the co-owners of the property. These can include taxes, HOA fees, the cost of repairs, landscaping, and utilities. All of these expenses are tax-deductible.
Typically, properties with fractional owners are managed by real estate management companies that take on the duties of landlording for a fee. They also typically handle:
- The selection, purchase, and renovation of the home
- Marketing the property and finding renters
- Holiday bookings, if this is a vacation property
- Signing contracts, filing taxes, and day-to-day administrative duties
Since the expenses, as well as the cost of the property manager, are shared between the homeowners, you’re never stuck with a large bill that you have to pay by yourself.
Easier to sell than a fully owned property
Like any other real estate investment, fractional ownership of assets is only profitable when held for the long-term and allowed to appreciate. It is not a short-term investment. That said, should you need to sell, it’s easy to offload shares in your fractional investment any time. To do so, the real estate platform you’ve invested through will reevaluate the current value of the property, and you will get a percentage of that total value depending on the portion of the property you own.
In many ways, selling fractional ownership in a property is much simpler and easier than selling full ownership. For one, you don’t need to get the property listed and ready for sale, and two, you don’t have to invite buyers and show them around. Co-ownership in a property means that even when you leave, the other owners still remain invested. Selling your portion of the fractional real estate simply means pulling out of the investment, thereby allowing for your shares to be re-listed and for that portion of the property to be resold.
This means that not only are you able to sell your fractional interest and get cash in your hands faster, you also don’t have to spend the time or money showing the property around. Over the life of a property, it is likely that there will be many fractional owners who come and go, and selling your shares is not that much more difficult than buying them.
Easier to diversify
Want to diversify your real estate investments but simply don’t have the money to buy many different of properties in many different markets? With fractional real estate, you can. For example, shared ownership allows you to partake in vacation home ownership while you invest in commercial real estate and single-family rental homes, all while making your own mortgage payments.
Since all your money isn’t tied up in a single investment, you can spread it out among different types of real estate, different locations, different grades, and even different neighborhoods in the same city. From there, you can choose to specialize in a single type or location, or keep diversifying and taking advantage of the variations in market ups and downs.
Diversification is, of course, one of the best ways to reduce the risk of real estate market fluctuations, and fractional investing allows you to get all the benefits of diversification without the downside of having to come up with large deposits for each individual property.
The cons of fractional ownership
Fractional ownership grants you less control
While there are some amazing advantages to fractional ownership, there are a few things you need to be aware of before you take the plunge. One of those things is that combined ownership means combined decision-making.
With full ownership of a property, you have a total say in all the decisions to do with a property. With fractional ownership, however, all the fractional owners have a say in the management of the property, including maintenance, repairs, and decor, and this can sometimes cause disagreements. Sales, too, have to be approved by all ownership partners.
This can be a problem if you’re particular about how you like things done or have strong opinions about how a property should be managed.
Management is generally costlier
Fractional ownership allows you to share in the profits from a real estate investment. But on the flipside, you also have to share in the costs. And because it’s easier to have a real estate management company take care of the details than multiple owners, there will be additional costs to bear. This means that management fees are generally higher than you’d have if you had full ownership of a property. This is especially true for short-term vacation rentals, where the fees for cleaning and upkeep can add up.
You’ll also have far fewer options for financing a fractional real estate investment because lenders are not often keen to offer mortgages on these deals. Though, given how little investment you can start with, this may not be an issue. Plus, fractional real estate platforms such as Arrived have already secured financing for the properties prior to your purchase, which makes for one less thing you have to worry about.
Easily invest in real estate
As you can see, there are numerous advantages to investing in real estate as a fractional owner. If, after reading through the fractional ownership pros and cons, you decide this model is right for you, starting is as easy as signing up, selecting a property, and making your first investment.
Arrived specializes in fractional real estate, which means you can buy shares and reap the benefits of value appreciation and rental income for years to come. You can browse through our available properties here and get started today.