Fractional real estate investing simply means being the owner of a fraction of a large or small property. This trend of purchasing real estate is most common in the commercial real estate business. Although it is very profitable, there is some downside to this.
Benefits
Low barriers to entry
In most businesses, the owner has to invest a large amount of money. If someone wants to purchase land or property by themselves, they have to gather a fixed amount of assets to get started. However sharing ownership and having control over a portion of the property is comparatively easy. One can invest a small amount of money and be part of a large asset.
Access to higher-value properties
When someone invests in a property solely, they are only able to be a part of a mediocre property. However, this investment strategy allows owners to purchase commercial real estate that they could never think of being a part of. On the other hand, fractional-owned property means the owner can participate in investing in other large-scale investments.
Less responsibility
If someone decides to invest in a fractionalized asset, they have less responsibility regarding the purchasing process. Signing some legal documents and conducting some self-research is good enough work. All the major activities will be done by the authority who is in charge of the planning committee.
Source of passive income
Ownership of frictional assets provides the opportunity to have passive income. As the owner is investing in commercial real estate, they can start gaining profit after investing. Moreover, they don’t have to work intensively for that.
Downsides
When multiple parties own a single property and enjoy the profit proportionally, it is known as owning fractionalized property.
Less flexibility and freedom- All the major decisions must go through all ownership partners. The chance of your opinion getting acknowledged is less. A frictional owner of a small part will not have much authoritative power. In addition, when it comes to selling the property. It must be approved by all the partners, which can take a huge amount of time.
Inherent risk- The real estate business has a particular kind of risk. Fractionalized property ownership also has those risks. But you have less power in your hands for that matter. Declining values, bad tenants, non-paying tenants, and a crashing market, are a few of the risks that can occur during the ownership.