If you’re looking for a way to build a diversified investment portfolio that allows you to benefit from cash flow, appreciation, and tax advantages, look no further than real estate.
When compared to other investments like stocks, it offers distinct long-term advantages.
And if you’ve ever thought you were precluded from investing in real estate because of a lack of experience or cash, think again. Fractional real estate investing is changing the game.
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What is Fractional Real Estate Investing?
Fractional real estate investing is a real estate investment structure that allows people to purchase a percentage of a home, commercial property, retail investment property, or even raw land, as opposed to buying the entire property.
You can think of fractional real estate investing like purchasing shares in a REIT, except all of the money is being pooled together for a single property or development. In essence, fractional investing is a crowdfunded approach to real estate investing. It brings a group of investors together to purchase a much larger property than any one individual would be able to buy.
Fractional investing isn’t a new investment model. It’s existed for years, though has typically been used in other asset classes. For example, wealthy individuals often purchase fractional shares of luxury yachts or private planes when they’re only going to be used part-time.
There’s also been a rise in fractional stock market investing lately. Major brokerages like Robinhood and Webull make it easy to purchase just a fraction of a single stock. (In other words, if Tesla stock costs $1,000, you don’t have to fork over the full $1,000 for a single share. You can purchase 10 percent of a share for $100.)
Until just recently, purchasing fractional shares of real estate investments was something that only accredited investors could do. However, rapid innovation in the industry has now made it possible for almost anyone to get in the game and get involved with real estate investing.
The Benefits of Fractional Real Estate Investing
Fractional real estate investing offers investors a long list of potential benefits and perks. Let’s explore a few of the top advantages and how they could help you:
- Low barriers. With a fractional investment model, you don’t need to plop down $100,000 or more for a down payment on an investment property. Just like you can purchase a small fraction of a stock with fractional investing, you can purchase a fraction of a property by combining your investment with the investments of dozens or hundreds of other individuals. As long as you have a few thousand dollars in investable cash, fractional investing is an option.
- Greater access. Most real estate investors are limited to their own local markets. This is fine for some folks, but can limit your opportunities if you live in a smaller market. With fractional investing, you can invest in the best properties from New York City to Miami to Los Angeles without ever leaving your house.
- Ability to diversify. If your portfolio is currently overloaded with stocks, bonds, and cash, fractional real estate investing gives you the ability to diversify with real estate. And if you’re already invested in real estate, it may give you the opportunity to diversify within the same class by adding commercial or retail property alongside your residential portfolio.
- Limited personal risk. Typically, when you invest in a property, you’re on the hook. If you can’t make the payments, you could lose it to foreclosure and seriously damage your credit. With fractional investing, you’re just one of many investors. You don’t have to take on a ton of personal debt/risk. And if the investment fails, you won’t be responsible for unpaid debts.
- No property management. One of the biggest downsides to investing in your own rental properties is the time required to manage them. From midnight maintenance requests to tracking down rent payments on the weekends, it’s a major time investment. With fractional investing, all of this is taken care of for you. It requires zero time commitment once the investment is made.
- Passive income. Most real estate investments aren’t truly passive (for the reasons mentioned in the paragraph above). Fractional investing, however, is the very definition of passive. Each quarter, a check shows up in your mailbox.
How Fractional Real Estate Investing Works
Now that you understand the benefits of fractional real estate investing, let’s explore how it actually works.
1. Property is Purchased
In order to purchase the property, the group leading the investment sets up a group, typically an LC or LLP. If you’re using an investment platform, it’s done through this group. Once you buy into the property, you become a co-owner and share in the benefits of ownership based on the percentage of “shares” you own. In other words, if you won three percent of the shares, you benefit in three percent of the cash flow (after all expenses and management fees). If you own 10 or 20 percent, you obviously enjoy greater upside.
2. Property is Maintained
The LLC/LP hires a property management company to oversee the property. This cost – as well as the cost of accounting, property upgrades, etc. – is split proportionally between all owners.
3. Receive Cash Distributions
Typically, cash-flowing properties like single-family homes, multi-family homes, retail properties, and commercial properties pay out cash distributions on a quarterly basis. If you’re making 10 percent annually (after expenses and fees) on a $20,000 investment, this equates to roughly $500 per quarter.
With fractional investment, you can always choose to sell your shares. If this is a decision that you make, the property will need to be reevaluated so that your shares can be priced out accordingly. Depending on how the fractional investment is set up, you may need to go find your own investor to buy your shares. Or, if you’re using a large online platform, they will offer your shares for sale within their network.
Real Estate Investing With InvestNet
At InvestNet, we’re always looking for qualified, active real estate investors who are interested in building their portfolios.
Over the past several years, we’ve established a rich database of off-market properties that are available exclusively to investors in our circle. Whether you’re looking to acquire single-family, multi-family, raw land, or retail we can help. Contact us today to learn more!
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