Fractional Real Estate Investing: Ownership of Shared Properties

You probably already know that real estate investing is a popular and time-honored method of generating wealth and diversifying your investment portfolio.

The problem? Real estate investing typically requires a big initial investment, and you might not have the means to make a massive down payment.  

Fractional real estate investing could be the perfect solution. It lowers the barrier to entry for real estate investment while still allowing you to diversify.

But how does fractional real estate work — and how do you get started?

In this article, you’ll learn all about fractional real estate investing, including how shared real estate investment opportunities work, the pros and cons of fractional home ownership, and where to find the best fractional ownership properties.

What is Fractional Real Estate Investing?

Fractional real estate investing allows you to purchase a portion (or fraction) of a property. Instead of purchasing the entire property, residential or commercial property is broken down into smaller portions, allowing multiple investors to buy in.

In return for your investment, you get a proportional share of rental income and any potential profits from the property sale.

How Fractional Real Estate Investing Works

With fractional real estate investing, multiple investors pool their resources and invest in larger, higher-value properties that might otherwise be out of reach for individuals.

Fractional real estate investing can be done in various ways, including:

• Crowdfunding websites: These sites typically allow you to browse a marketplace and choose opportunities. Typically, properties are professionally managed, so once you invest, you don’t have to deal with the day-to-day management duties.
• Direct fractional ownership agreements: This is a type of ownership where several people pool together their assets to purchase a property and share the responsibilities associated with property ownership and management.  

Benefits of Fractional Real Estate Investing

Here are some of the reasons why fractional real estate investing is so appealing…

1. Access to higher-value properties

Fractional real estate investing gives you access to a smaller portion of a high-value property versus a large portion of a low-value property.

Often, this means access to properties with a higher rate of return than traditional single-occupancy homes, such as commercial real estate, houses of multiple occupancies (HMOs), and luxury homes.

2. Lower capital requirements

Investing in fractional real estate requires a lower initial investment than purchasing a property alone or outright. This makes it more accessible to a wider range of investors, including those who may not have the resources to invest in real estate otherwise.

3. Diversification of investments

Fractional real estate investing lets you diversify your investment portfolio by giving you access to the real estate market.

4. Passive income

Fractional real estate investments can provide you with regular, passive income from rent and other returns.

Often, fractional real estate investments are professionally managed by agencies. This means you don’t have to deal with the day-to-day duties associated with property management. Typically, agency fees are deducted before you receive payments.

5. Flexibility

Fractional real estate investments offer more flexibility than traditional real estate investments. Because you can invest in multiple properties, you can diversify your investments and select properties or markets that closely align with your investment goals and preferences.

In addition, fractional home ownership allows you to experiment and manage risks at a level that is not feasible with single-owner investments. By purchasing a fraction of a property, you can test the waters without committing to a significant investment method. This allows you to gain valuable experience in the real estate market, learn how to manage risks associated with property ownership, and better understand your personal appetite for risk.

Drawbacks of Fractional Real Estate Investing

No investment strategy is perfect. Here are some of the drawbacks of fractional real estate investing…

1. A volatile market

Real estate investments can be volatile and unpredictable. Property value can be impacted by factors such as:

• Interest rates
• Economic conditions
• Changes in supply and demand

However, fractional home ownership can mitigate this risk since you’re not all-in on a property.

2. A loss of risk or damage to the property

All real estate investments carry the risk of property damage or loss through tenant damage, accidents, or other unforeseen events such as natural disasters.

While to a certain degree, this is unavoidable, fractional ownership lets you avoid the complete burden since you’re just one of many owners.

3. Risk of conflict

Too many cooks in the kitchen: it’s a thing with fractional home ownership.

Conflicts between investors can arise due to differing opinions on risk tolerance, time horizons, or investment objectives. For example, some investors may be more interested in short-term gains, while others may be looking for long-term appreciation.

The solution? Clear lines of communication. Establish goals and expectations from the outset and establish a process for making decisions and settling disputes.

Should You Invest in Fractional Real Estate?

Fractional real estate investing lowers the barrier to entry for real estate investments. It might be right for you if:

You want an investment that requires less initial capital

You don’t want to deal with the burden of property management

• You want an investment that offers flexibility and diversity
• You want access to higher-end properties that may be out of reach otherwise

But remember — as with any investment, fractional home ownership has an element of risk.

So before investing in fractional real estate, you need to consider your personal goals and do your due diligence.

The 5 Best Fractional Real Estate Investing Platforms:

1. Fundrise

Overall Rating: ⭐⭐⭐⭐

Asset: A range of options. However, predominantly electronic real estate investment trusts (eREITs)

Investment Minimum: $10

Accreditation Requirement: None

Average Annual Returns: For the most up-to-date information, check out their website.

Fees: Varies by service — see the fee schedule here.

Fundrise is a popular real estate investing platform that provides various investment opportunities tailored to different investment goals, and investors receive quarterly dividends

.

In addition, Fundrise features a secondary marketplace for selling shares, providing increased liquidity for investors. While there are minor penalties for selling shares before five years, the added flexibility makes it an appealing option.

2. Yieldstreet

Overall Rating: ⭐⭐⭐⭐⭐

Asset: Art, real estate, multi-asset class fund, structured notes, supply chain funding

Investment Minimum: $15,000

Accreditation Requirement: Primarily accredited

Average Annual Returns: 9.7%

Fees: Between 1-4% annually

Yieldstreet is an online investment platform offering individuals a diverse range of alternative investments, primarily for accredited investors.

The platform provides access to unique investment opportunities such as real estate, art, and structured notes. The real estate offerings include commercial properties, apartments, and multi-family properties.

Yieldstreet aims to democratize investment opportunities for individuals, providing access to previously exclusive asset classes typically reserved for institutional investors.

With a focus on transparency, low fees, and simplified investment processes, Yieldstreet makes it easy for investors to diversify their portfolios and potentially earn higher returns.

3. Arrived Homes

Overall Rating: ⭐⭐⭐⭐

Asset: Fractional ownership properties

Investment Minimum: $100

Accreditation Requirement: None

Average Annual Returns: 3.2-7.2%

Fees: 1% annual management fee

Arrived Homes is another online investment platform focused on investments in residential real estate properties.

The platform primarily offers single-family homes.

The user-friendly interface simplifies the investment process — once you select an initial property, the minimum investment is just $100, but average returns range from 3.2 to 7.2%. Since Arrived Homes is available to both accredited and non-accredited investors, it’s a great starting point for new investors.

4. Percent

Overall Rating: ⭐⭐⭐⭐

Asset: Private credit (Private consumer and small business loans)

Investment Minimum: $500

Accreditation Requirement: Must be an accredited investor

Average Annual Returns: 12.56%

Fees: None

Percent is an online investment platform that offers accredited investors access to private credit as a form of investment.

These private credit investments can offer a different type of access to real estate investing, and offer potentially great returns — the platform boasts an impressive 12.56% average annual ROI.

As for fees?

Percent charges variable fees depending on the investment product.

• For direct deals, 0% management + a % of yield 
• For managed products like Percent Blended Notes, 1% management + a % of yield

For example, if a deal paid 15% APY and the fee charged was 10% of interest, your effective APY is 13.5% after fees.

Beyond what they offer, how they offer it matters. Percent is also known for its knowledgeable and friendly customer support team. If you’re looking for a way to diversify and potentially earn higher returns, Percent might be right for you.

5. RealtyMogul

Overall Rating: ⭐⭐⭐⭐

Asset: Commercial real estate

Investment Minimum: $5,000

Accreditation Requirement: None; accredited investors have access to additional investing options

Average Annual Returns: 6-8%

Fees:1-1.25%

RealtyMogul‘s primary focus is democratizing real estate investing and making it accessible to individuals through fractional home ownership options. The platform sources investments from some of the best institutional-grade properties.

With a low investment minimum and transparent fee structure, RealtyMogul is a great pick if you’re looking to expand into commercial real estate but don’t have a ton of money.

The platform’s user-friendly interface makes it easy to browse and select suitable investment opportunities, track your investment performance, and receive regular updates.

Alternatives to Fractional Real Estate Investing

If shared real estate investing doesn’t seem the right fit for you, there are several other investment alternatives to consider:

• Real estate investment trusts (REITs): REITs allow you to invest in shares of publicly-traded companies that own (and usually operate) income-producing properties of all types.
• Direct real estate investing: This involves the direct purchase of a property. Usually, the property is purchased outright for the purpose of renting. You have more control of the investment, but you also have to manage it.
• Real estate syndication: This is similar to fractional home ownership. With real estate syndication, a group of investors will pool their resources to purchase and manage a real estate project. It can offer higher returns than other real estate investment options. However, it also carries more risk. Fractional real estate investment may be a more risk-friendly option.
• Peer-to-peer lending: Sometimes called a private equity loan, this type of investment is where investors lend money directly to individuals or businesses (no middleman) for real estate investments or development projects.

Final Word: Fractional Real Estate Investing

Fractional real estate investing can give you access to high-quality real estate properties that might otherwise be inaccessible.

It also offers you the potential to generate passive income through rental income, diversify your portfolio, and potentially earn higher returns than traditional investments.

But like any other type of investment, fractional real estate investing comes with its risks and drawbacks. This includes conflicts between investors, risk of property damage, and housing market volatility.

Ultimately, the best investment option for you will depend on your risk tolerance, financial goals, and personal preferences. Be sure to do your due diligence before making any investment decision.

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