In this article, I will share with you what is fractional ownership in real estate and how to make huge money online. And also, what are the differences between a REIT and a Fraction property?
It is not like REIT, as most people confuse it. REIT is like a stock trading in the stock market. But a fractional ownership investment is a real property that is for sale in a fraction. Like you are buying a percentage of that building that is fractional ownership in real estate. We will discuss this in detail. You just read on.
Table of Contents
- Fractional Ownership in Real Estate – The 12 Steps
- 1) What is Fractional Ownership – A New Era Begins
- 2) Is fractional ownership a good investment?
- 3) Minimum Investment Required
- 4) Why you should invest in fractional real estate?
- 5) Fractional Real Estate Investing Advantages
- 6) Why is this fractional real estate investment booming?
- 7) The Risk Involved
- 8) Tax on Fractional Ownership
- 9) Available Ownership Data (SPV Agreement)
- 10) Documents You Must Sign to Invest
- 11) Hidden things to Keep in Mind Before You Invest
- 12) REIT versus Fractional Ownership
- Last Words
Fractional Ownership in Real Estate – The 12 Steps
Down below, I have pointed out, what we are going to learn in this article.
- What is Fractional ownership?
- How does it work?
- REIT and Fractional ownership. Which one is better?
- Advantages and disadvantages?
- What is the eligibility?
- The returns (cash flow)?
- Tax charges?
- What are the risks?
- Effects of the market conditions?
- Where to start?
1) What is Fractional Ownership – A New Era Begins
The best part of this type of real estate investment is you can invest from anywhere in the world digitally, with no hassle, and you become a real owner of a property, not like a stock owner in REITs.
As the name suggests, you can purchase a fraction share of a huge commercial building with a minimum investment of $5,000 via some well-known online platforms like:
- Property Share
- Roofstock One
- Asset Monk
- Myre Capital
You can use these platforms to buy a fraction of a property, just like a share but of real property.
All the data about investments are available on those platforms. Sign up, connect your wallet, invest through their certified platform and earn dividends annually. How much? As high s 19% per year.
2) Is fractional ownership a good investment?
Research says on average fractional ownership gives a return of 8% to 19% per year. If you invest $5,000, you can have $500 annually as a profit (ROI is 10%).
These returns don’t fluctuate often as this platform invests only in commercial buildings and generates rents. And you know a rental contract in a commercial building is 5 to 10 years. No less than that, that’s why it gives you a stable return.
3) Minimum Investment Required
In commercial property, a minimum of $5,000 is required, which can vary in every country. But, if you are buying a huge building and there are only ten investors, you need to invest more.
For example, you want to invest in a $1M commercial building. And only ten people are ready to purchase that building. So you need to invest $100,000 to get in.
That kind of variation might affect you in the fractional owner, or you say co-ownership property. But, experts say a minimum of $5,000 is the minimum, no less than that.
4) Why you should invest in fractional real estate?
Investing here is very easy, with no documents hassle or any kind of broker hassle. They will manage everything. All the paperwork you face in physical property, you will not counter here, a simple pocket investment.
You can check all the documents on the platforms, like:
- Sale deed
- Title deed
- Lease agreement
- SPV agreement
SPV agreement is the most important thing in this FO investment, continue reading, and I shall tell you why should check it first.
5) Fractional Real Estate Investing Advantages
These are the advantages if you invest in a FO.
- Easy online investment option.
- The minimum investment is only $5,000.
- Earn steady dividend every year.
- Your property will appreciate it.
- Complete security.
That is why fractional property investments are booming all over the world. Best suitable for a beginner who is looking for a diversified portfolio.
6) Why is this fractional real estate investment booming?
The main reason behind it is super liquid property investment. If you try to sell a physical property, it might take up to five months to sell it with all the headaches. But here you can sell it in minutes. That is the biggest reason people are attracted to it, as it is like real physical property.
Plus, people are diversifying their portfolios with this FO investment. Most investors diversify their portfolios like these:
- Real Estate
- Fractional ownership
This gives them the flexibility to manage their investment portfolio and a steady income over the years.
7) The Risk Involved
There is risk also. Make sure you analyze the investment property just like physical property. What are those? Let me tell you when you invest in a property, you verify:
- All the documents first
- The legal codes in the area and does the property match with those
- Carpet area Built-up area and Super built-up area
- Owner details
- Developer details
- Market growth
- New business in the area
- Crimes rates
- Net Operating Income
- Cap rate
- Applicable taxes
- Maintenance fees
- And a lot more.
You must check the FO as like physical property to not get scammed. And only invest with a good company.
8) Tax on Fractional Ownership
Taxation is no different than a normal property. The LTCG & STCG also applies here. If you sell your share after 24 months, you will be charged as long-term capital gain (LTCG) before that will be charged as short-term capital gain (STCG).
- LTCG: 10% to 15%
- STCG: 20%
In every country, these numbers can vary. In some countries, long term means to sell the property after one year, and in some countries, it’s three years. Check first what your county is offering and then act accordingly.
9) Available Ownership Data (SPV Agreement)
If a building is trading like a FO investment, then an SPV (specific purpose vehicle) is created by a trustee company or an LLP (limited liability partnership).
This trustee company will manage the SPV, and the SPV will collect money from investors to invest in a property. They also are responsible for distributing the profits among the investors.
If you buy a commercial property, you will get shares and if you buy a residential property, which is rare in the FO industry, you will get a percentage of the property.
All the data related to the property are available on those platforms and also will be available on:
- Government database
- Public database
- Investor’s database
So that no one can scam you in FO investment. You can check all the facts with all these data.
Plus, the company is proving fractional investment must have a certified license from the government. Otherwise, don’t invest with them.
10) Documents You Must Sign to Invest
There are some documents you must check and sign to invest in a FO securely, and those are:
- SPV agreement
- Sale agreement
- Registerar of compnaies (ROC)
- KYC verification
- And all other casual documents related to the property
Please make sure all the documents are verified, and then you are free to invest.
11) Hidden things to Keep in Mind Before You Invest
There are a few hidden things that I want you to know before you put your hard-earned money.
- You must hold the investment for at least six months, you can not sell it prior to that. That is the only disadvantage of fractional ownership.
- They will charge 1% management fees over the total value of the property’s share you have to manage your property every year.
- It’s profitable and risky. So make sure you do your due diligence properly.
The market’s up and down shall also affect this type of investment. FO is not invincible. If the occupancy rate goes down, the rental income will also go down. That will reduce your profit.
12) REIT versus Fractional Ownership
Some people are talking about this as a kind of REIT. But no, this is no REIT. A REIT or real estate investment trust is a stock that is traded in a stock market via a Demat account. But, this investment is only traded on a particular platform far from the stock market.
You can visit your building to check all the facts if you wish to, But the stock is not physical. It is just a share that has no feelings attached to it.
Both investments are used for diversification. Both can give oy a good return on your investment. But, my friend FO is different from a normal REIT.
Fractional ownership is booming right now all over the world. If you want to diversify your portfolio, you can check it out. I am not recommending you invest in a FO. It’s your choice to do so. Do the due diligence first.