Traditionally, investing in real estate took a large financial commitment and a lot of time. The investor bought the property, got it tenant-ready, and acted as the landlord, accountant and property manager.
Fractional real estate investing offers an alternative. Investors can pool resources with other investors, gain access to a wide range of investment properties, and never once spend a Sunday afternoon replacing the fill valve on a toilet.
But like any investment venture, there are advantages and disadvantages to consider before diving in.
What is fractional real estate?
With fractional real estate investment, multiple investors collectively acquire stakes in a single property.
The process involves a platform serving as an intermediary, sourcing viable properties, partitioning their value into shares, and managing the investment on behalf of stakeholders. Upon purchasing shares, investors pool their resources to fund the property acquisition and subsequently can potentially earn rental income and asset appreciation in return.
However, fractional ownership may present liquidity challenges despite its advantages in reduced entry costs and potential passive income. While some platforms offer secondary markets for share trading, immediate sale opportunities may be limited, necessitating a longer-term investment outlook.
Advantages of fractional real estate investing
Fractional real estate investing can be more accessible than traditional real estate investing and offer a hands-off approach to day-to-day operations. Some key advantages:
- Lower barrier to entry: Shared ownership enables access to properties that would typically be financially out of reach.
- Passive income: Investors may be able to generate wealth through rental income and property appreciation.
- Professional management: Fractional investors can benefit from expert property management, sparing them from day-to-day landlord responsibilities.
- Flexibility: Investors can diversify their portfolios beyond their local area, capitalizing on opportunities nationwide.
- Cost sharing: Shared expenses, including taxes and upkeep, can lessen the financial burden on individual investors.
- Diversification: Fractional ownership allows for spreading investments across different property types and locations, potentially mitigating risk.
Disadvantages of fractional real estate investing
As with any form of investing, there are also disadvantages to consider, such as:
- Limited control: Investors have less say in property decisions than full ownership. Typically, design, tenant screening and maintenance are handled by either the platform or decided on by the investor pool.
- Higher management costs: Professional management fees can be higher than investors might face as a DIY landlord.
Fractional real estate investment can present an accessible avenue for diversifying one’s portfolio and accessing otherwise unattainable real estate opportunities. However, potential investors must conduct thorough research, consider associated fees and risks, and align investments with their financial goals and risk tolerance. As with any investment, informed decision-making is crucial for success.
Ready to diversify your investment portfolio with real estate? Explore Arrived’s opportunities to invest as little as $100 or up to $15,000 per property in single-family homes and vacation rentals across various markets. Or, consider the Arrived Single Family Residential Fund for instant diversification.