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.
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.
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:
Now that you understand the benefits of fractional real estate investing, let’s explore how it actually works.
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.
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.
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.
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!