How Does Fractional Real Estate Investing Work?

Would you own a house…partially?

No. Everyone who “owns” a share CANNOT stay there. But, can benefit from the rental cash flows without putting up the full equity for the house.

That’s called, Fractional Ownership Investment

Today, we cover:

1. Why Does Real Estate Investing Make Sense Today?

2. How does fractional Real Estate work?

3. What does fractional real estate investing do well?

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Why Does Real Estate Investing Make Sense Today?

Investors are always looking to beat the market.

Through meme stocks. Through fancy PE funds. Through alternative assets.

We’re currently in an environment with ~5% interest rates.

I, for one, hold the view that higher rates are here to stay for longer.

So, let’s compare two of the most popular asset classes: stock and real estate.

In US stocks, historically, the market risk premium has been 5.7%. Today, it is just under 3%. This means that investors in the market are NOT being compensated for the additional risk of holding equities.

Here’s how this environment makes real estate investing interesting:

Higher interest rates increase mortgage costs, making rental income lower

Rents are increasing faster than ever before, topping 18% in March 2022

Higher cap rates

This means that investors can buy rental properties for a lower price (due to higher cap rates), AND benefit from rising rents without heavily hurting NOI’s based on the debt structure of the deal.

The type of product that would be good to buy: multi-tenant commercial properties that are too small for institutions and too big for individual investors. This would be a ~ 30,000-40,000 sqft property for workshops. The tenants find it hard to lease similar spaces and would have to work with higher rents.

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How Does Fractional Real Estate Work?

It is a form of collaborative real-estate ownership, where the cost is split amongst several buyers.

Each owner receives a deed for shares owned with a partnership agreement to share costs (maintenance/repairs) and benefits (rent, property appreciation).

This is usually offered by a Fractional Real Estate Investing Companies that facilitates liquidity of shares and the purchase of the property based on their strategy (type of real estate/ hold period).

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What Does Fractional Real Estate Do Well?

• Access to the masses.

• Passive income generation.

• Liquidity (if through a real-estate platform).

What Doesn’t Work?

• Restrictions to sell based on hold-period.

• Complex tax implications.

• Main return driver is through an exit, which has no guarantee.

• Limited inventory with real-estate platforms.

• Trust platforms with offerings the right properties.

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Fractional real estate investing has caught onto the world quick, especially with stocks.

Initially, there was great interest in real-estate, but how will it fare in these conditions as it becomes the most-watched asset class?

See you next week.