Fractional Real Estate investing has gained so much traction in the last few years. There are many reasons for this, but the main one is the low initial investment it takes to dip your toes into real estate when you use this method.
While, generally, fractional real estate investing can be less risky and easier to enter, there are still some things you should know before you dive in headfirst.
As I mentioned, there is a low barrier to entry when it comes to fractional real estate investing. The reason is, as the name implies, you’re going to only pay for a fraction of the property and maintenance.
You’ll be investing in something like an apartment complex most of the time. The developing company will handle all of the decisions and work to get the complex up and running, deal with the tenants, etc.
While the fractional investors make a passive income proportionate to their shares in the company, this makes fractional real estate investing similar to the stock market, in a sense. You don’t need to know anything about technology to invest in Microsoft.
Another huge advantage of fractional real estate investing is that it allows you to diversify much easier than typical real estate investments. With normal real estate, you’re going to have a lot of funds tied up in a single property because generally, properties are quite expensive.
Beyond the price, you’ll also have to invest quite a bit of time. With fractional real estate investing, if you remain hands-off, you can invest in many different properties without worrying about your time. If one fails, that’s unfortunate but not the end of the world.
This is both an advantage and disadvantage. I covered how this is an advantage; you’ll save a lot of time and not have to get hands-on with the development.
This is great if everything works out. However, you’ll also be putting your money in someone else’s hands because you’re not going to have much of a say in how everything works.
Going back to the apartment complex, you won’t have much of a say in choosing or handling tenants, what goes into the complex, or anything of that nature. This is why it’s important to pick a company with a nice track record or a vision that you believe in.
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Most investment sponsors will require their investors to make some kind of commitment. Usually, this will be around a decade or so. I’ve seen a commitment requirement of as low as 10 years, but it typically will not be lower than that.
This means you will not be able to sell your shares until that timeframe is up. So just because you’re only in for a fraction, does not eliminate your commitment to the property or the investment.
Just because fractional real estate investing is “safer” than regular real estate doesn’t mean you can just throw your money around without a thought. As I mentioned above, you’ll be agreeing to a 10-year commitment most of the time, and you won’t have much of a say in how the business is run. This means you should know who you’re going into business with and how they plan on succeeding.