Real estate is a great investment vehicle. Not only does it offer portfolio diversification, but also recurring monthly income from the tenant or tenants renting the property. In the United States, the average annual return on investment (ROI) for residential real estate is 10.6 percent, which is comparable to investing in the S&P 500, the benchmark index that has generated an average ROI of 10.7 percent since its inception in 1957.
Unfortunately, traditional real estate investing isn't a reality for most people, as the majority of rental properties cost more than $100,000 and usually require a down payment of at least 20 percent. Owners are also responsible for paying property taxes and maintenance costs. Real estate investment groups (REIGs) and real estate investment trusts (REITs) offer more cost-friendly points of entry for prospective real estate investors, but still require investments ranging anywhere from $1,000 to $50,000.
Fractional ownership, a concept that dates back to the late 1970s in Europe but has become increasingly popular in recent years, is an alternative strategy that makes owning and investing in real estate more accessible to the general public. Investors pool together their money and split the cost of a property, sharing ownership and usage rights.
Below are some commonly asked questions about fractional ownership and its viability as a real estate investment strategy.
What are some of the key benefits of fractional ownership?
In addition to a lower point of entry for real estate investing, fractional ownership is associated with high yields and predictable and consistent earnings. In addition, it outperforms several other investment vehicles in stability, safety, and ROI. There's also generally less paperwork and administrative burdens.
Is it the same thing as a timeshare?
The concepts of fractional ownership and timeshares are similar in that they offer individuals access to a particular property for a set period of time each year. However, there are plenty of differences, most notably in equity rights. In a fractional ownership agreement, all parties not only share the property, but also earn a percentage of income from capital appreciation. A timeshare is strictly a vacation rental property with no investment component.
Fractional ownership also provides investors with greater flexibility in terms of property usage and ownership. There are usually 12 or fewer owners, whereas timeshares are often split by anywhere from 26 to 52 owners and have a usage expiration date. Investors in a fractional ownership agreement, meanwhile, can own a share of a property for as long as they wish.
How are property usage rights determined?
Not all fractional ownership agreements are the same. There are four primary types—joint ownership, company structure, trust structure, and cooperative model—and usage rights for each of these is determined either by a pay-to-use or usage assignment model. As suggested by its name, the pay-to-use approach involves co-owners paying a per diem/week fee based on how much they use the property and this helps cover the property's mortgage. Co-owners also split maintenance and repair costs.
In a usage assignment approach, co-owners can use the property for a predetermined period of time each year. Those who invest more generally have access to the property for longer periods. For instance, consider a fractional ownership agreement with four investors, one of whom covers 50 percent of the costs with the other three splitting the remaining 50 percent. The primary investor, in a usage assignment, would have access to the property for six months per year, while the other three would have access for two months each.
Is fractional ownership a viable investment opportunity?
As mentioned, fractional ownership outperforms many other investment types in ROI, but its principal selling point is relatively low upfront costs. There are several companies that provide low-cost fractional ownership opportunities. One of these companies, Landa, allows people to invest as little as $5. With rising real estate prices throughout the US, fractional ownership offers the average person the ability to generate reliable and consistent wealth.
"“I'm in the Bay Area, so homes are pretty expensive. I look at a home that's $800,000 and I see that it sold five years ago for $450,000," noted Nate Gipson, a mid-20s program analyst who has invested in real estate via multiple fractional ownership platforms. "There's just no way for the average person to keep up with that. There's just no way."
How can I access fractional ownership investments?
There are several companies that make fractional ownership investing easy for the average person. Fundrise, founded in 2010, is a business that gives small investors the ability to purchase shares of residential and commercial real estate bundles. Similar companies include RealtyMogul, Landa, Lofty AI, and Arrived.
Lofty AI is a cryptocurrency-based platform that sells fractional "property tokens," which users can sell whenever they want. The company distributes rental income to investors each day. Arrived, the most prominent fractional real estate investing startup, had a $25 million funding round in May 2022 with support from high-profile investors like former Amazon CEO Jeff Bezos and Uber CEO Dara Khosrowshahi. More than two-fifths of its investors are renters.