What Is a Fractional Investment in Real Estate and How Is It Different From REIT Investments?
Buying a house property needs a huge investment. That is why people need to take home loans. However, self-occupied properties help the owner not only save on the rent paid but also benefits of appreciation in the property value. Similarly, rented-out properties help the investors earn regular rental income.
But house properties are not very liquid assets and need expenditures on paying house taxes, interest on home loans, maintenance, etc, that take the luster off as an investment product.
To make the property investments attractive, investment vehicles like REITs (Real Estate Investment Trusts), fractional investments in real estate, etc are now available, where investors may invest in smaller amounts and get returns without taking care of maintenance, home loan, property taxes, etc.
While REITs are like mutual funds that have multi-level organization structures and are regulated closely, fractional investments are quite like stock investments, where investors have the freedom to choose the stocks, but may have higher risks.
The fractional investment provides investors access to high-value high-return opportunities by letting the investors invest a small amount of money and yet own a part of prized real estate properties without having to physically manage it.
It not only allows the investors to diversify their wealth portfolio but also grow it seamlessly by potentially yielding returns of around 14 percent over a 5-year investment horizon.
Frxnl, which is a technology-enabled investment platform offering fractional investment opportunities in pre-leased Commercial Real Estate, offers clients investment opportunities starting as low as Rs 10 lakh.
Amit Uppal, CEO & Co-Founder, Frxnl explains how fractional investments are different from REITs investments:
Low Stock Market Correlation
REITs are publicly listed investment instruments, and their pricing is subject to the vagaries of the stock markets while Fractional ownership platforms allow one to invest in a private holding structure that has a very low correlation with the public markets, as their shares are not publicly traded. Besides, about 80 percent of our average household wealth is in real estate and less than 5 percent is in Financial markets. So, you may derive from that how the demand for both are likely to be different.
Higher Control Through Ownership
Unlike in REITs, where the manager aggregates the portfolio, in a Fractional Investment platform, you choose the assets you want to be invested in. As a matter of fact, REITs are obligated to invest a minimum of 80 percent of the value of assets in completed and rent-generating properties, while 100 percent of your capital is invested into a rent-generating asset on a fractional ownership platform. The difference is akin to picking up a mutual fund vs individual stock. An investor would partly but directly have ownership in the real estate they invest in through Fractional investment platforms.
REITs are required to distribute a minimum of 90 percent of distributable cash flows, while fractional ownership platforms distribute 100 percent of their net cash flows
Fractional ownership platforms can have a much wider charter in terms of opportunities they bring onboard unlike REITs which are primarily designed for a certain scope of assets. Investors can look at diversifying better through fractional investments with the flexibility on offer. What is key is to see how fundamentally strong and secure the investment and governance processes are when it comes to non-public ecosystems.
Nonetheless, fractional ownership is for sophisticated investors, and one should thoroughly evaluate the risks and take financial and legal advice before investing.