An Investor’s Guide to Fractional Real Estate Investing
March 21, 2022
There are many ways to invest in real estate today. From buying a property outright to fractional real estate investing, where you buy shares in a residential or commercial property. Fractional real estate investing is gaining momentum because it reduces barriers to entry for new investors while maintaining the high rates of return historically enjoyed by property investors.
What Is Fractional Real Estate Investing and How Does It Work?
Fractional real estate investing means you own a fraction or portion of a piece of real estate, but you get all the same benefits you would have gained if you owned it yourself. You don't have to worry about property management, expenses, or anything else that goes along with real estate investing, but you get to reap all the benefits.
Here's how it works.
A company buys a piece of real estate. It could be residential but is usually commercial real estate. The company then divides the property's cost into fractional shares, which they sell to investors like you. Sometimes there could be a few investors and other times hundreds.
Anyone that invests receives cash flow from the rent paid on the property, whether commercial or residential. However, not all properties have rental income immediately, so it's important to pay attention to the type of property you're investing in, whether the investor is developing the property or buying a property that's already producing income.
Fractional Ownership of Personal Properties vs. Commercial
The fractional ownership model looks different for personal properties versus commercial properties.
Fractional ownership of personal properties is usually a vacation property. Each owner gets either time occupancy or space occupancy. Time occupancy, sometimes known as a timeshare purchase, gives fractional owners a specific amount of time each year to use the property. With this real estate investing method, you own the property with other owners, and you each get your time in the property, and you each benefit from the property's appreciation.
However, commercial property fractional ownership usually doesn't include any time occupancy. Therefore, rather than receiving time in the property, you acquire rights to a prorated amount of the rent received either weekly, monthly, or quarterly.
Fractional Investing vs. Private Equity
Fractional options often include private equity. So rather than being a 'versus' situation, it's a situation where you have a choice.
A private equity investment is usually an LLC (company) that buys commercial properties and raises equity for the property by letting investors purchase shares. All investors then earn a prorated rental income, cash flow, and profits earned when the property is sold.
Another popular fractional ownership option is the Real Estate Investment Trust. REITs are companies that own multiple properties, usually commercial real estate and sell shares of their company. Investors that purchase shares get access to the rent, cash flow, and profits of all properties owned.
One last option is the Delaware Statutory Trust. This trust is explicitly established to invest in commercial real estate. Like the REIT, investors purchase shares of the trust and earn a prorated amount of the income earned by the real estate.
Pros and Cons of Fractional Real Estate Investing
- No Big Down Payment/Low Barriers to Entry
- Diversification - Putting all your eggs in one basket is never a good idea, but with real estate investments, it's easy to do. You buy one property and put all your money into it. If the property value falls, you could lose all your invested money. Using the fractional ownership model, you diversify your funds across multiple properties.
- Access to higher-value properties - When you invest in a single property yourself, you might only be able to afford a mediocre property that might or might not be the right investment strategy. Still, without the funds of others, it's hard to purchase commercial real estate. On the other hand, fractional-owned property means you can invest in more valuable commercial properties with more income potential.
- Access to Competitive Markets- Markets like Seattle, New York, LA, San Francisco and Denver price many people out of the market. Fractional investing gives people access to competitive real estate markets with higher returns.
- You don't have to do the work - Fractional ownership opportunities are a form of passive income. You don't have to do any physical work to maintain the property, yet you reap the financial rewards, much like you would when you invest in the stock market. You are a partial owner of the company, but you aren't rubbing noses with the CEO helping them make decisions.
- Passive Income- Fractional real estate provides investors with the opportunity for passive income without having to actively work to earn money.
- Expert Analysis That Reduces Risk- Financial professionals are doing analysis and looking at emerging real estate markets to find the best places to invest in real estate. Investing in fractional real estate gives investor's the opportunity to leverage the experience of seasoned real estate investments to reduce risk.
- Great Traditional Returns- Historically, real estate returns have been great for investors. In the US, for example, the average rate of return on real estate is 8.6%. Las Vegas’s real estate market in particular is booming. In the last year, rent prices have grown over 10% and the population has grown over 2%.
- Good for New Investors- Fractional investing is a great choice for new investors interested in getting started with real estate. Fractional real estate provides individuals with the opportunity to invest in diverse investments without much work on their part. All investments come with risk, but real estate traditionally has great returns.
- Long commitments required - Most real estate investments have a long timeline. You might find some with a redemption program allowing you to liquidate your shares early, but it's not typical. Many investment property options require a timeline of 5 to 10 years.
- Inherent risk - All investors take risks. It's what gives you a great rate of return. However, real estate has several risks, including declining values, bad tenants, non-paying tenants, a crashing market, and more.
- Fractional investment opportunities have fees - Fractional ownership companies must charge fees if they want to stay in business. Each company has its own fee structure, so it's important to read the fine print, including the minimum investment timeline. Some fractional share opportunities have timelines as long as 5 to 10 years, and if you withdraw early, you'll pay redemption fees in addition to the standard assets under management fees.
Platforms You Can Use for Fractional Investment
There are many fractional ownership opportunities today, but the most common companies include the following.
Concreit invests in first-lien mortgages on commercial real estate to help borrowers get the funds they need. In addition, they offer private non-traded REITs to help you invest in real estate. What's great about Concreit is you can invest with as little as $1, and it's open to everyone, not just accredited investors.
Concreit professionals vet every opportunity and only accept the investments that fit their investment strategy and help people like you invest in the real estate market. Most of their investments are in apartment buildings or multifamily units - commercial properties that create an income.
Fundrise lets non-accredited investors invest in fractional ownership of real estate in both residential and commercial real estate. Fundrise sells REITs to investors through both the equity and debt side of real estate investing. Fundrise offers investment opportunities starting at $10 and up to $100,000. There's no penalty for early redemption of your shares if you need to bail, and there are four investment portfolios to choose from.
Crowdstreet offers real estate investors the opportunity to invest in debt or equity real estate investments. Rather than investing in a diversified portfolio, you invest in individual projects, whether debt or equity.
You can earn monthly or quarterly dividends as well as capital appreciation if you invest in fractional ownership real estate.
If investing in apartment buildings has always piqued your interest, consider DiversyFund. They offer real estate investors the chance to invest in undervalued apartment buildings that have potential but need improvements so they can increase their income.
Real estate investors earn cash flow from the rental income earned, but not until the building is sold and the investment matures. During the investment, all cash flow is reinvested in the property to help it increase in value. All investors receive their prorated amount of dividends and capital appreciation upon maturity.
How to Sign Up for Fractional Real Estate Investing
It's easy for anyone to sign up for fractional real estate investing at Concreit. Just download the app, provide your personal information and link your funding account to get your investments going.
It takes just seconds to sign up, and before you know it, you'll be investing in real estate as a fractional investor in no time.
ROI on Fractional Real Estate Investing
Before you invest, you probably want to know how individual investors make out. What ROI do they have?
While every investment opportunity is different fractional real estate investing has a strong track record, especially when you diversify your funds. Since there's a low entry barrier, you need longer to grow your investments, but the timelines are typically no more than five years.
With Concreit, you always have a way out should you need it, unlike if you invested directly into real estate properties. You don't have to worry about selling a physical property, waiting for the right seller, and waiting months for the funds to come.
You can liquidate your shares on the market whenever necessary, but there is an early redemption fee if you redeem before one year.
Fractional Real Estate Investing FAQ
Does Fractional Ownership Appreciate?
Yes, just like a residential property you might own, fractional ownership appreciates. You earn a prorated amount of the appreciation based on the percentage of the property you own. When the investor pays out, they pay each owner a percentage of the capital appreciation and any other dividends earned.
There's never a guarantee that real estate will appreciate, though. Like any market, real estate values have highs and lows, and no one can predict what might happen.
What Is The Minimum Investment Amount For Fractional Real Estate Investing?
The answer to this question depends on who you decide to invest with. Some investors can buy fractional shares for as little as a dollar.
How Is Fractional Ownership Calculated?
Fractional ownership is calculated based on your invested amount compared to the property's value. For example, if you invested $1,000 and the property is worth $100,000, you own 1% of the property.
You earn dividends and appreciation based on the percentage of your ownership.
Can You Earn Passive Income Through Fractional Real Estate Investing?
Yes, you can earn passive income through fractional real estate. When you invest in fractional real estate, you don’t have all the responsibility that goes into traditional real estate investments. You’ll want to research the investor and the property to make sure it's reputable and the level of risk. After that, you buy a share and start receiving income from the rent paid.
Is Fractional Real Estate Worth It?
If you're looking to break into real estate investing but don't have the funds to buy it outright, fractional real estate can be the next best thing. Even if you have the capital to invest in real estate yourself, fractional investing diversifies your funds and helps you avoid a total loss should one property not perform well.
You can invest in fractional real estate in both residential and commercial properties. If it's residential, it could be a rental with income or a timeshare that provides you with access to the property throughout the year.
Is Fractional Investing Right for You?
If you're looking for a way to break into real estate investing, consider fractional real estate investing. It's a way to earn passive income and not have to worry about property management. Instead, you fund your investment and sit back and watch the money roll in between the appreciation and monthly cash flow. If investing in fractionally owned property sounds right for you, take a look at our website to learn more and get started!
This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security which can only be made through official documents such as a private placement memorandum or a prospectus. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Neither Concreit nor any of its affiliates provides tax advice or investment recommendations and do not represent in any manner that the outcomes described herein or on the Site will result in any particular investment or tax consequence.Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Concreit does not guarantee its accuracy.