Diversifying Your Investment Portfolio with Fractional Real Estate

Portfolio diversification is an important investment requirement for minimizing risks. However, portfolio diversification is not available equally in all investment assets. Specifically, real estate shares a very low possibility for portfolio diversification.

But, fractional real estate differs in this respect. The ease of diversification in a fractional real estate portfolio is a primary reason behind the huge popularity of fractional real estate investing. Many online investment platforms are now offering fractional real estate ownership options to provide diversification for your investment portfolio.

Here, we’ll discuss in detail how you can generate good returns with fractional real estate investment.

What Is Fractional Real Estate?

Fractional real estate is a type of real estate investment, which is gaining remarkable popularity in current times. In fractional real estate investment, investors can invest in a fraction of the total cost of a real estate asset. It allows investors to invest in high-yielding commercial real estate assets, which are unavailable to individual investors otherwise.

In fractional investment, a group of investors collectively invest in one single property. Fractional investment platforms establish a Special Purpose Vehicle to process the complete procedure of fractional ownership. This SPV gathers the required funds from multiple investors to purchase a premium-class real estate property.

Thus, the investors own shares of that asset according to the ratio of their investment amount. In India, the minimum investment amount for fractional real estate investment usually ranges between 15 lakhs to 25 lakhs. Within such a budget range, you can invest in different property types including luxury residential properties, high-yielding commercial assets, vacation homes, penthouses, etc. in fractional real estate.

Benefits of Fractional Real Estate

The immense popularity of fractional real estate is the result of multiple benefits obtained from this investment mode. Let's discuss those benefits in detail.

Lower Investment Minimums:

While traditional real estate investment requires a very high investment minimum, fractional investing lets you invest in real estate at a remarkably lower amount. This enables individual investors to invest in premium real estate assets with a minimum investment requirement of 15 to 25 lakhs.

Before fractional investment, real estate investment was impossible for investors with a limited budget. But, since this investment mode entered the market, all investors interested in real estate investment found a way to make their dream a reality.

Diversification:

Diversification is another important benefit provided by a factional real estate investment portfolio. Since fractional ownership is a low-cost investment, you can buy multiple fractional shares from multiple real estate assets.

It provides good portfolio diversification and minimizes the risk at the same time. Because, investing in a single asset with a huge capital involvement is much riskier than investing in multiple assets with lower monetary investments. At the same time, a well-balanced fractional real estate portfolio also increases the possibility of better long-term returns on your investment.

Liquidity:

There is a possibility that fractional investment platforms might offer better liquidity options compared to traditional investment. Buying an entire asset is not easy. Selling an asset might also be difficult while you own the entire asset. But, it is much easier in fractional real estate investment, as you own only a portion of the entire property.

At the current time, the popularity and acceptance of fractional real estate ownership is increasing rapidly. People are showing more interest in buying a fractional share of a high-value property than buying the whole property. The desire to invest in a high-value asset at an affordable cost has led them to invest in fractional real estate. Thus, this investment mode is gradually gaining better liquidity with the rise of potential investors in this field.

Passive Income:

Fractional real estate ownership is an important source of passive income. The 8—12% annual return is quite a good income compared to the responsibility involved in fractional investment. The moderate market condition, low risk, and fractional real estate investment portfolio diversification inherent in the investment mode help in earning a good potential return.

Here, your income rises with the increasing value of the asset. Moreover, fractional ownership provides you with the opportunity to invest in good income-generating assets like commercial real estate along with the possibility of rental yields. This rental income opportunity in fractional investment adds to the passive income potential in this investment mode.

Different Types of Fractional Ownership Models in Real Estate

Fractional ownership platforms offer different types of fractional ownership models for real estate investment. Here is a discussion about some of the predominant models among them.

Shared Equity Model:

The shared equity model of fractional ownership indicates the investment model where a group of investors accumulate their funds to purchase a premium real estate asset. Every investor here owns a percentage of the equity based on their investment proportion.

Just as the investment is shared in the shared equity model, the risks and responsibilities are also shared. Thus, this shared fractional investing model is relieving for individual investors, as the entire responsibility of the investment does not fall upon one single investor. The shareholders are allowed to make use of the property for a designated period on a yearly basis in the shared equity model.

Rental Income Sharing Model:

The rental income sharing model of fractional ownership is a good source of stable passive income. In this model, a group of investors collectively invest in a high-yielding property. Then, according to the proportion of the investment amount, each investor obtains an equal share of the rental income generated by the investment asset.

This fractional investing model allows the group of investors to lease out the invested property to tenants, which is a hassle-free way to earn passive income.

Tokenization Model:

The tokenization model of fractional ownership comes from blockchain technology. With the integration of blockchain technology into fractional ownership platforms, the tokenization model has gained considerable popularity.

This fractional real estate investment model converts the fractional shares into digital tokens using blockchain technology. This way, the buying and selling of fractional shares becomes easier. This mode of fractional investment enhances the liquidity of real estate assets.

Real Estate Investment Trusts (REITs):

Real Estate Investment Trusts (REITs) do not come strictly under the limit of the fractional investment model. However, the ability of fractional real estate investment portfolio diversification and liquidity make REITs mentionable in this respect.

REITs are companies that own, operate, or finance income-generating real estate covering multiple property sectors. Although REITs are not exactly a fractional investment model, they are also a type of investment through funding, where an investor does not have to buy an entire property for himself/herself.

REITs work like mutual funds. They let numerous investors invest in properties, which they purchase and develop as a part of their own investment portfolio. So, REITs do not provide any kind of property ownership to their investors. They just let them invest in the invested properties and provide them a share of the dividend based on their investment amount.

How to Invest in Fractional Real Estate?

Fractional real estate investment is easy through fractional investment platforms. Such platforms usually work through Special Purpose Vehicles (SPVs). This reduces the investment risks for the main investing company.

The SPV pools funds from investors and purchases a premium real estate asset. Following that, it offers partial ownership of the property to the investors based on the percentage of their respective investment amounts.

To invest in fractional real estate, the first step is to choose the right platform offering the best fractional real estate investment facilities. Then, do thorough research about the available properties offered for fractional ownership on that particular platform. Analyze the risks and potential returns. Based on your research, select the property or properties that match your investment preferences, and go ahead to invest in it.

If you want to diversify your fractional real estate portfolio, you can choose to invest in multiple shares in different real estate assets. This will also minimize your investment risk.

Fractional Real Estate vs. REITs

Fractional real estate and REITs look very similar on the first note. Characteristics like the low investment amount, multiple investor involvement, investment returns, etc. make them look almost identical. However, they work differently.

While fractional real estate indicates partial shares of real properties, REITs are securities that become available after being listed by stock exchanges. In India, REITs are regulated by the Securities and Exchange Board of India (SEBI).

Let’s go through the crucial similarities and dissimilarities between these two investment modes.

Similarities:

• Both fractional real estate investment and REITs require a smaller investment amount compared to traditional real estate investment.

• Both these investment modes require multiple investors for one single property.

• Both allow individual investors to invest in premium commercial real estate assets and earn monetary benefits out of that investment for the long term.

Differences:

• In fractional ownership, the investors become owners of partial shares of the invested property based on their investment ratio in the entire investment. But, REITs do not make the investors the owners of their invested share of money. They just pool funds from the investors and offer returns on their investments.

• Although both fractional ownership and REITs allow investors to invest in a much smaller amount than in traditional real estate investment, there is a huge difference between the minimum entry barriers in both investment modes. Fractional real estate investment is available at a minimum investment amount of 15 to 25 lakhs, whereas investing in REITs is available at an even lower amount of 10,000—15,000 rupees.

• The Securities and Exchange Board of India has control over REITs. But fractional real estate investing is not yet controlled by SEBI, although the board recently proposed regulating this investment field too.

• In fractional real estate investment, investors are free to select the property type and the property to invest in. On the other hand, REITs do not let investors choose the investment property type. Thus, investing in a REIT is like buying an investment portfolio, where you don’t have any control over the investment. But, you can have complete control over your investment in fractional ownership.

• For investing in fractional real estate, fractional ownership platforms are there. REITs can be invested through stock exchanges.

Considerations for Investing in Fractional Real Estate

Investing in fractional real estate needs to consider certain factors since it involves some risks. With thorough research before starting with the investment, you can prevent such risks effectively. So, let’s analyze them below.

• When going to invest in fractional real estate, it is necessary to check if your chosen investment platform is well-established. Investing through an established platform ensures that a great investment journey is awaiting you. An established platform indicates that they have come through years of experience in the investment field. It assures the safety and security of your investment.

• The expertise of the leading team matters. Examining the expertise level of chosen fractional ownership platforms and choosing a platform with an expert team and a good and successful track record should be the first step before starting with the investment.

• Another important consideration is to choose platforms providing diverse investment options along with different property types.

• Moreover, consider observing legal and financial permissions obtained by the fractional real estate investment provider you chose. Not having permission to work as a fractional investment provider may result in monetary fraud.

Conclusion

The huge money requirements in real estate investment reduce diversification possibilities for this particular field. However, the arrival of fractional ownership in the real estate industry has brought vast possibilities for diversification in this industry.

Due to low barriers, entering into the fractional real estate field is easy. So, if you are looking to diversify your fractional real estate portfolio or your investment portfolio in general, fractional real estate is a promising option. Exploring this investment model provides you with a dynamic financial future with a chance to earn steady passive income. Careful decision-making and active involvement in the process are two factors in this case that can make your fractional real estate investing career successful.

FAQs

What is fractional real estate?

Fractional real estate is a type of real estate investment where an investor can invest in fractional shares of a single property. Through fractional ownership platforms, this type of real estate investment lets investors invest in high-yielding commercial real estate assets with shared ownership, shared responsibility, and shared income.

What are the benefits of fractional real estate?

Fractional real estate ownership opens the door to real estate investment for all types of investors including those with a limited budget. It has a low investment barrier. Fractional real estate investment portfolio diversification is again remarkable along with ease of liquidity options. Apart from that, Fractional real estate is a good source of stable passive income.

How does fractional real estate work?

Fractional real estate works through fractional ownership platforms. These platforms establish an SPV or Special Purpose Vehicle. This SPV pools funds from a group of investors and purchases a premium commercial real estate property. This way, each investor becomes the partial owner of his share of the property and becomes a shareholder of the property’s total generated income.

How do I invest in fractional real estate?

To invest in fractional real estate, register with a particular fractional ownership platform based on your needs and preferences along with the credibility of the selected platform. Then, choose the property or properties where you want to hold one or multiple shares. After that, you can go ahead with your investment according to the set criteria of the particular platform.

What are the risks of investing in fractional real estate?

Fractional real estate investment involves several risk factors. To mention them, potential conflict among co-investors, risks of property management, limited control over the property, maintenance and upkeep expenses, unpredictable market conditions, and low liquidity are some of the most remarkable ones.