Real Estate Investing

Fractional Real Estate Investing: Top Pros and Cons

Stephanie

October 28, 2022

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https://www.getaway.co/articles/fractional-investing-pros-and-cons

Fractional real estate investing is appealing and hugely growing in popularity across the U.S. Getting all the benefits of owning a dream home, including profits, for a fraction of the price sounds incredible. There are a great number of pros, that cannot be argued with, but fractional investing is not without its cons too.

What is Fractional Real Estate Investing?

Fractional real estate investing is a type of property ownership where rather than owning the property in its entirety a person can own a fraction of it instead. This fraction can vary in size and can have any number of people holding a fraction of the property. 

Fractional ownership means that you also only cover a fraction of the ongoing maintenance and upkeep costs, usually in direct proportion to your ownership share. This also means that you are able to take a proportional share of the profits achieved through property ownership whether that be from the sale of the property or from rental income.

A key element of fractional real estate investment is that you are a genuine owner of your part of the property, which means you hold the title deeds to the property and can do what you like with your share. You could sell it for profit or pass it on to a family member. 

How Does Fractional Real Estate Investing Work?

Fractional investment is certainly an alternative investment method. The whole concept of fractional ownership requires everyone who has a vested interest in the property to stick to an agreement. This requires a written agreement explaining that all costs, but also benefits, are shared between all of the property’s owners. There are a variety of benefits you might get from fractional ownership such as financial gain but also a share of visitation rights for vacations. Almost all of the time, fractional ownership groups hire a management company to carry out the day-to-day work of owning a property (especially if it is a vacation rental property) and protect ownership interests

Fractional ownership usually often relates to a single property that you have selected, but fractional ownership clubs are becoming more commonplace. These clubs allow you to own a fraction of a wider number of properties, usually spread across the country. This is great if you’re planning to visit the properties for vacations, plus the varied geography of the properties spreads risk from local economic issues that might arise.

It is important to remember that with fractional ownership your responsibilities and benefits are directly proportional to your investment, as is often the case with home co-ownership. Let’s say that you own 10% of a property, you are therefore entitled to 10% of any profits, but also any costs related to the property. If it is a vacation rental it means you’ll have access 10% of the time, unless it is rented out for profit.

Advantages of Fractional Real Estate Investing

There are a great number of advantages to fractional real estate investing, what follows are the most important and noticeable.

Accessibility

Compared to traditional real estate investing, where you have to find the entire downpayment, secure a mortgage, then cover all of the related costs solo, fractional real estate investing has a far lower entry bar. You need to invest a far smaller amount, sometimes as low as $1,000, compared to the tens or hundreds of thousands of dollars usually required this is far more accessible.

Diversification

There’s a phrase, “Putting all your eggs in one basket” which is usually seen as bad investment advice, but it’s what the majority of people do with their real estate investments. They either put all their money into their own home or into one investment property. Fractional investment allows you to diversify that investment across multiple properties, meaning you can grow a portfolio remarkably quickly.

Avoids Debt

Many fractional investment schemes don’t require a downpayment or, if they do, a far smaller one. With traditional homeownership, you, through a mortgage, take on an enormous amount of debt. This is a serious mark on your credit file which can make it harder to achieve other forms of leverage in the future.

Disadvantages of Fractional Real Estate Investing

Of course, there have to be some disadvantages to fractional real estate investing. Unfortunately, it isn’t purely advantageous, although often the pros outweigh the cons.

Illiquid

Every fractional ownership scheme is different and relates directly to the properties and parties involved, but the majority of them tend to be longer-term investments without the ability to easily access liquidity for other investments. Fractional investment shouldn’t be seen as a get-rich-quick scheme.

Lack of Autonomy

When you’re investing by yourself you have access to a few more options. Let’s say you want to invest in the property and renovate it yourself to flip for profit, this isn’t usually an option with fractional investment as you won’t be able to make the decision solo. You certainly wouldn’t be able to live in the property while you renovate it, as many house hackers do. You’ll also have to pay a management company to look after the property rather than managing your portfolio yourself.

Often Requires Accreditation

There are many fractional investment schemes where you won’t need to be an accredited investor, but many do require you to be. That means you’ll have to have a net worth of over $1 million and an income of $200,000 or more annually. For most people, that puts it off the table, which is unfortunate when you consider the appealing aspects.

Key Takeaways: Is Fractional Investing in Real Estate the Right Choice?

For the most part, fractional investing is a great option for the majority of people. You need to find the right scheme, but when you do and can invest with a fraction of the finances usually required it is a very attractive proposition. The most important takeaway is to remember to conduct your own research and not dive into any investment without thoroughly understanding the potential outcomes.

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