Analysis of Fractional Real Estate

You can significantly raise your passive income by getting into fractional real estate. However, there is typically a high up-front cost to get started. Only some people have the financial resources to purchase a house, make necessary repairs, and rent or sell it.

But investing in fractional real estate is another way to enter the market. 

Data compiled by hBits for an analysis of fractional real estate, a real estate company specializing in fractional ownership, show that fractional ownership has increased over the last five years with a total estimated payment of Rs 750 crores. The last year, or the time following the first Covid lockdown, saw transactions totalling Rs 350 crores.

You can consider investing in fractional real estate if you want to start a real estate business but need more funds. Here are some advantages and disadvantages that you should consider before beginning.

Advantages of Investing in Fractional Real Estate

Given below are some of the advantages of investing in fractional real estate:

Lower Barrier to Entry

One of the biggest advantages of fractional real estate is the lower entry barrier. It allows you to invest in more expensive properties in markets you might not have otherwise been able to. You can divide the cost among several investors rather than having to come up with a large down payment on your own. You could avoid getting a mortgage if you have many people to pay for the property in full with cash. Also, due to their high demand, these properties are less likely to remain vacant for an extended period, which raises your future rental income.

Deeded Ownership

You obtain a deed for your equity share when you purchase a fractional stake in a property. Like any other real estate, this gives you the freedom to sell, offer as a gift, or inherit the asset and put it in a trust.

For many retail investors, fractional real estate ownership is an excellent investment because of this shared equity model. You can invest in single-family homes in major cities, vacation rentals in well-known tourist destinations, and commercial properties only open to accredited investors for a lot less money than it would cost to buy a property outright.

Passive Income

As a fractional owner, you can invest in real estate and not only increase your capital as the value of the asset rises, but you can also generate income from renting out the property.

Therefore, all income derived from fractional ownership is passive and requires little effort.

Easier to Diversify

You can diversify your money among various real estate types, locations, grades, and even neighbourhoods within the same city. From there, you can decide whether to focus on a single location or keep diversifying and get profit from fluctuations in market ups and downs.

Easier to Sell

Selling fractional ownership in real estate is simpler and easier in many ways than selling full ownership. For starters, you can show potential buyers around the property without preparing it for listing. If you share property ownership, the other owners will continue to be invested even if you move out. Selling your share of the fractional ownership simply means that you are ending your investment. It allows the shares to be relisted and your share of the property to be sold again.

Disadvantages of Investing in Fractional Real Estate

Like any other investment, Fractional Real Estate has its disadvantages given below:

Less Control

Having the freedom to make decisions for yourself is one of the benefits of owning your property. Some control is given up when you share that asset with others. Less control over how a property is run is granted as the number of shareholders or owners increases. If you’re picky about how things are done or have strong ideas about how a property must be managed, this could be a problem.

Costlier Management

You can participate in the rewards of an investment in real estate through fractional ownership. However, you must also contribute to the expenses. Additionally, there will be additional costs to bear because it is relatively simple to get a real estate management company to handle the details than multiple owners. As a result, management fees are typically higher than they would be if you were the sole owner of a property. This is particularly true for short-term rental properties where the costs for maintenance and cleaning can add up.

Unknown Co-owners

Suppose a fractional real estate company is helping you buy and manage the property. In that case, you’ll likely be dealing with many random people. If disagreements over who owes what and other issues arise, that could cause problems later. 

Harder To Finance

A couple financing a residential home differs from a group of investors financing a house. Typically, mortgages are only issued for one or two people. The simplest way to deal with fractional real estate is to pay for it outright with cash, but there could be issues if you don’t.

Barriers to Entry for Retail Investors in Commercial Real Estate

There are many barriers to entry for retail investors in real commercial investors. These are given below: 

Large ticket size 

A retail investor may find it challenging to buy an A-grade property if they don’t have the required funds due to the high ticket size, which can range from 40 to 50 crores. 

Lack of knowledge 

In the past, retail investors needed more skills to assess supply and demand, understand the dynamics of a micro market, and determine the occupancy rate. 

Lack of liquidity

Investors favor options with greater liquidity and ease of exchange. In the past, liquidity was only available when selling the property.

Investments in fractional ownership are the solution to these issues and a means of limiting entry barriers. When taking advantage of these opportunities, investment in fractional real estate puts retail investors in a competitive position with institutions or fund houses.

Conclusion

Investment in fractional ownership is the one way to increase your passive income and get started in real estate investing. It’s a great option for people with little money who want to avoid the hassle of maintaining and owning a second property. According to surveys and some analysis,  fractional real estate ownership will be widely adopted in Bengaluru, Pune, and Mumbai, with lawyers, chartered accountants, doctors, and IT professionals showing strong interest.

Before you fully commit, do a thorough analysis of the fractional real estate and calculate the potential returns to ensure you’re getting the most out of your investment.

Bhive specializes in fractional real estate. So, by purchasing shares, you can benefit from future value growth and rental income. For more information, contact our experts and visit our website at Bhive.