A Guide to Fractional Real Estate Investing
For ages, Real Estate has been considered an excellent investment option, and for all the right reasons! Our elders hit the jackpot by investing in properties in developing areas. The values of these properties soared high in no time and gave them immense profits.
So, because of these practices, whenever we hear the phrase “real estate investing”, what comes to mind is buying properties and becoming landlords. But owning an entire property comes with its fair share of ups and downs, not to mention the toll it can take on our wallets.
In recent years, a new concept has emerged in the Indian real estate market – fractional real estate investing. This model allows multiple investors to own a portion of a property collectively! It makes real estate investment more accessible and affordable for a wide range of investors.
Like REITs (Real Estate Investment Trusts), it brings a new dimension to the traditional idea of property ownership. It gives investors the opportunity to diversify their portfolios and invest in properties that would otherwise have been too expensive for them.
In this article, we’ll explore how fractional real estate investing works, its pros and cons, and how it is different from REITs!
what is fractional investment real estate?
Have you ever thrown a party or an event with your friends/family by pooling in money?
Fractional real estate investing is somewhat like that. This concept allows multiple individuals to pool their financial resources and collectively invest in a property. Rather than purchasing an entire property on their own, they can buy shares or fractions of the property. Each investor then owns a percentage of the property equivalent to the number of shares that they hold.
A variety of such properties are listed on online platforms or managed by specialized real estate companies. Based on the investor’s preferences and budget, they can choose to buy a portion of a vacation home, a commercial building, etc. This concept makes investing in real estate more accessible and affordable.
how does this work?
To understand the work of fractional real estate ownership, let’s explore the working of SPV – Special Purpose Vehicle.
Every property available for buying and selling for fractional investment in real estate goes through a Special Purpose Vehicle (SPV) process. Think of SPV as a trustworthy middleman created to make things more organized and transparent.
Here’s how it works: Let’s say there is a parent company that offers fractional ownership opportunities. It sets up SPVs to handle each property transaction. These SPVs gather funds from people interested in investing. Once enough funds are collected, the SPV uses them to buy the property on behalf of the investors. The property then gets registered between the seller and the SPV. The investors become a shareholder in that SPV, and their share percentage of the property is easily accessible through the parent company’s website.
When the parent companies present their offerings, interested investors can review details about the property, potential returns, and the cost per share. Investors can purchase multiple shares according to their wants and needs!
The rental yields that are offered to the investors typically range from 8-10% annually and the payouts are scheduled monthly or quarterly. However, it should be noted that the minimum amount of investment is 25 lakhs as these are A-Grade properties.
Also Read: Why Real Estate Is the Worst Investment?
pros and cons of fractional real estate investing
Like every other thing in the world, fractional real estate investing comes with its list of pros and cons. Let’s explore the
|Investors get access to high-value properties that may have been unaffordable individually.||Investors have a limited say in property management decisions. Major decisions are usually made by the real estate company.|
|Investors can diversify their portfolios by investing in multiple properties across different locations rather than owning a single property.||The liquidity of these shares is not very high. This makes it challenging to exit investments quickly.|
|Investors earn rental income and profits from the property appreciation without even actively managing the property.||The property's value could experience a decline, and there's also the possibility of damage or the need for expensive repairs.|
|It gives investors the liberty to select the desired share of the property.||Disagreements among co-owners can arise, leading to conflicts over property usage or decision-making.|
are fractional ownerships a good investment?
A good investment helps generate consistent returns and aligns with our financial goals. Investment planning is crucial for effectively managing our financial resources. Fractional real estate investing is a good option for inventors who are seeking exposure in the real estate market. It offers the chance to diversify across different properties, locations, and types of real estate, reducing overall investment risk. The annual average returns range from 8-10% which is believed to be good
However, it does come with its own sets of risks like any other investment. The illiquidity of the shares should be thoroughly considered beforehand. The investors should first investigate and assess the property’s potential.
what is the difference between reit and fractional ownership?
Real Estate Investment Trusts (REITs) and fractional investing real estate are often mistaken for each other, as they share a common concept of pooling money to purchase property. However, there is a significant difference between the two.
Real Estate Investment Trusts (REITs)
|They are more secure as they are regulated by SEBI.||They are comparatively a little less secure as they are regulated by RERA.|
|The shares are traded on stock exchanges, hence they provide high liquidity.||The liquidity of these investments is low and exiting it may take some time.|
|It is like a mutual fund that is looked after by professional fund managers.||The properties are managed by specialized real estate companies or platforms.|
|The minimum amount required to invest in REITs is 10-15 thousand.||The minimum amount required to invest in fractional real estate is 25 lakhs.|
|Investors have no control over the types of properties that they invest in.||Investors have full liberty to choose the type of property they want to invest in.|
Fractional real estate investing has gained much popularity in the past few years in India due to its online accessibility. This growing trend has caught the attention of SEBI, and they are considering regulating it in the near future. It is an exciting opportunity for investors to diversify their portfolios and access high-end properties.