Fractional Property Investment
Invest In Real Estate with Lower Capital Requirements
What is Fractional Real Estate Investing?
Fractional property investment involves multiple investors collectively owning a property through a platform or trust. Rather than purchasing total ownership of a property, each investor buys a percentage or fraction of the property, allowing for several investors to own and profit from the property together. A fractional property investment makes it easier for a person to invest in real estate with lower capital requirements.
For example, an investor may only have the capital to purchase a small unit in a regional location. But with fractional real estate investing, they can pool their resources with other investors. This allows them to purchase partial ownership of a luxury property in a desirable inner-city location, where there are higher rental yields and excellent potential for further appreciation.
Investors benefit from potential rental income and appreciation value proportional to their ownership share. In other words, if they own 1/5 of the property, then they will receive 1/5 of the profits.
Fractional property investment can help investors to diversify their property portfolio and reduce their individual risk. It also gives first-time investors access to the real estate market without having to save large sums of capital.
What are the Benefits of Fractional Property Investment?
Fractional property investment is a convenient way for investors to access a competitive real estate market. Some of the benefits include:
1. Access To High-Value Real Estate
Fractional real estate gives investors access to high-value properties that might otherwise be out of their price range. This may include properties in desirable areas or homes with strong potential for appreciation.
For example, without having to make a sizable upfront investment, an investor can secure partial ownership of a multimillion-dollar waterfront home in one of Sydney’s elite neighbourhoods.
2. Real Estate Diversification
Fractional purchasing makes it easier for an investor to diversify their real estate portfolio. By distributing their funds among several different kinds of property, investors may lower their risk and increase the robustness of their property investments.
For example, rather than using all of their savings to buy one residential property, an investor may hold fractional shares in a range of residential properties, commercial office buildings and apartment complexes located throughout various Australian cities. This ensures they’re not putting all of their investment “eggs” in one basket.
3. Fewer Entry Obstacles for Real Estate Investment
Investing in fractional real estate can help to reduce common obstacles for first-time investors. It makes it possible for those with lower incomes to get involved in the real estate market, without having to shoulder sole financial responsibility for an entire property.
For example, instead of having to save hundreds of thousands of dollars for a deposit on an investment property, a first-time investor can enter the property market with a more modest amount of capital (such as $100,000).
Regulatory Aspects of Real Estate Fractional Investing
The Australian Securities and Investment Commission (ASIC) is responsible for regulating fractional real estate platforms in Australia. Adherence to ASIC regulations helps to safeguard investors’ interests and ensures the transparent functioning of these platforms. These regulations include the need for online platforms to:
- Hold an Australian Financial Services (AFS) licence (or operate under an exemption).
- Provide clear and accurate information to investors about the nature of the investment, including any associated risks, fees and charges.
- Ensure client funds are held in trust or in accordance with regulatory requirements.
- Have robust compliance and risk management systems in place.
- Implement appropriate security measures, including customer identification and verification procedures.
- Implement an effective dispute resolution service to address investor complaints.
Regulatory compliance ensures that fractional real estate platforms uphold legal requirements, offer accurate property appraisals and run their businesses in a transparent manner.
What are the Costs of Real Estate Fractional Investing?
- Platform fees (account setup fees, transaction fees and ongoing management fees).
- Acquisition costs (legal fees, due diligence inspection costs and property valuation fees).
- Operating expenses (property management fees, maintenance/repair costs, insurance premiums and council rates).
- Performance-based charges (usually calculated as a percentage of the investment’s profits).
- Exit fees (may be charged if the property is sold).
It’s important for investors to carefully review the fee structure and any terms and conditions to ensure they clearly understand all the potential costs. Investors should also consider the overall cost-effectiveness of the investment and how fees may impact their overall returns.
Liquidity In Fractional Real Estate Investing
Understanding liquidity implications is crucial for investors in balancing their investment strategies. Liquidity impacts an investor’s ability to buy or sell assets quickly without significantly affecting their price.
There are considerable differences in the liquidity of fractional real estate investments when compared to a more traditional method of property investing. When selling a fractional investment, it may be necessary for you to find another buyer on the same platform or arrange for the other co-owners to buy you out. Both of these processes may take more time than if you were simply selling a regular investment property.
To minimise potential risks, it’s important to carefully consider liquidity before committing to a fractional investment purchase.
Key Takeaways
Fractional real estate investing allows multiple buyers to collectively own a property. This reduces the initial capital requirement, making it easier for investors to access the property market and diversify an investment portfolio.
While online platforms have simplified fractional property investment, it’s still important to consider potential costs and liquidity implications before committing to a purchase.
To make well-informed decisions about fractional real estate, buyers need to perform due diligence checks, make sure they understand all related costs and choose a platform that complies with all legal requirements. Conducting a thorough initial evaluation will help to mitigate the risks associated with fractional investing.