How does Fractional Ownership Work?

If you are considering Fractional Real Estate Investing to be the best technique to diversify your investment portfolio and increase your returns. It’s crucial for you to understand how fractional ownership works. In this blog, we’ll figure out and discuss the risk involved, emphasising a few case studies and other necessities for a successful investment.

How does fractional ownership work?

As you choose fractional ownership real estate, you inevitably become a co-owner of a particular real estate asset. Here, you contribute your resources alongside other co-owners to ensure financial stability. Fractional ownership renders you to sell the particular property, give away or transfer the property to your desired person.

Depending on the investors and organisations involved, you will find various ways in financing for fractional ownership, as an illustration:

• Deed and Equity:

First, you can acquire a deed and shares representing the property’s value or you can purchase shares of the property directly. The investors don’t have to take any kind of headache as all responsibilities are handled by the property management firm.

• REITs:

Secondly, REIT, Real Estate Investment Trust is a popular way of becoming a fractional owner of real estate. Investing in REITs means buying shares or units that offer a stake in a collection of various properties.

• Timeshare Ownership:

Timeshare ownership of vacation properties is another option for attaining fractional home ownership. Here, investors usually buy a portion of the property for a specific time period each year. This allows people to enjoy vacation homes without being completely responsible for the cost of sole ownership.

• Crowdfunding:

Crowdfunding is another platform for Fractional real estate investing that offers investors to combine their money together and buy shares in a real estate project. Each approach provides unique benefits such as shared ownership, professional management, access to vacation properties, and investment opportunities for smaller investors.

Suppose, when a company purchases an asset for fractional ownership real estate, they tend to divide the value of the asset into smaller shares and sell it to the investors and that's how you receive a share of the overall value. Below are some points that would give you insights into how does fraction ownership work in the real estate industry:

• Buying:

In order to make it easier for you to purchase a property, property management forms a Special Purpose Vehicle ( SPV) that helps you buy the property. This makes you the co-owner of the existing fractional property by owning a percentage of it. Based on the percentage of the portion they own, the benefits of rental income or property appreciation are shared among the co-owners.

• Upkeep of property:

The property management company takes care of the maintenance of the property as the expense of the property is properly divided among the co-owners based on their shares. The company handles all the necessary maintenance from repairing to creating rental agreements.

This is one of the important points where you would understand how fractional ownership works, as it solely looks after the management system without bothering the investors.

• Sale and sell:

Fractional real estate investing is a long-term investment, like any other investment. But it is different from any other investment because of how fractional ownership works, it allows the investor to sell off the portion of your share whenever you want to. The value of the property is re-evaluated once to decide to keep it on sale which assures that the return you receive from it is justified or not.

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Process of Financing for fractional ownership in Real Estate.

So as to understand how does fractional ownership work, it is necessary to know the process of fractional investing that makes all the securities more easy and accessible for the investor. Before, investors had to buy the whole of the expensive shares like stocks or exchange-traded funds (ETFs), while now investors can buy a portion of the share.

The process how fractional ownership works is known as “fractional share trading” which involves breaking down the security into smaller pieces of stocks, bonds or shares. These smaller pieces of shares are known as “fractional shares”. The buying and selling process of these shares is called “fractional shares trading”.

For instance, if the security is worth Rs 1000 per share, then you can buy a portion of it buy Rs100. Through various online investment platforms, fractional investment has marked its bench by offering the service of fractional share trading. Considering the needs and solutions of investors, these platforms provide a smooth run of investing whether it's buying, selling or tracking their shares. In commercial properties, fractional investment is generally made through a Special Purpose Vehicle (SPV). This SPV is formed to raise funds to manage the properties and being an investor you will own shares of the SPV.

Furthermore, fractional investing in real estate depends on the availability of fractional shares offered by brokerage firms or investment platforms. Though it might have certain restrictions and limitations.

Understand Fractional Ownership real estate investment and how it is calculated.

Ownership shares are released to the shareholders for many reasons in the form of compensation, stock splits etc. to understand the ownership percentage in a company, you should start by figuring out the amount of money you are willing to invest because the value of the shares depends on

1. The whole number of shares available in the company.

2. Overall value of the company.

When you have the overall value of the company, divide your amount of contribution by the total investment to calculate your ownership stake which will be useful to discuss your ownership percentage with other shareholders.

Here, let's discuss the process of understanding the fractional real estate investing percentage in a company. Below are the four important concepts to understand an individual's ownership percentage.

• Authorized Shares:

The maximum number of shares that a company is allowed to issue to its shareholders without needing to change the articles of incorporation are known as the authorized share. These numbers of shares are designated and approved by the company’s article of incorporation. Here, the articles of incorporation of a company especially determine the types and amount of shares a company holds. In order to issue more shares, the directors and the shareholders are required to vote and agree to amend the article. 

Although it is amendation of the article of incorporation is a common practice when it comes to issuing more shares during equity financing rounds. The company is entities in increasing the number of shares or creating new classes of preferred shares. There is no specific number of authorized shares fixed in a company.

• Issued Shares:

Apart from the given authorized share, sometimes the shareholder expects to get more of the shares by asking for approval from the board of directors, the extra shares that are issued are known as Issued Shares. These are the same authorized shares that have been issued by the stakeholders, including the common and preferred shares, issued to the investors, founders etc.

If a company decides to issue more shares they have to go through amending the articles of incorporation, and the approval from the directors ensures the issuance of the shares is paralleled with the strategies and aims of the company.

• Share Equivalents:

Another additional instrument that a company provides to their shareholders is share equivalents. These can be in various forms, such as stock options, warrants, future stocks, purchase rights or convertible instruments. Share equivalents play a crucial note in understanding the overall ownership and dilution of existing shareholder, as it represents the potential impact on the whole share of the company and the percentage of the ownership of different shareholders.

Moreover, considering the share equivalents, it is necessary to calculate the share outstanding. These help provide a comprehensive picture of the company’s capital structure and the potential future impact on ownership dynamics.

• Outstanding shares:

Another concept in Fractional Ownership is the “Outstanding shares”, the total number of shares or share equivalents that have been issued by the corporation are known as Outstanding shares, excluding the shares that have been repurchased or reclaimed by the company.

You will come across various reasons why a company repurchases or reclaim shares such as, the company choosing to buy out shareholders in order to enhance the worth of the shares or due to the right of first refusal, etc. It is the total number of shares that are currently with the shareholders and is active in the market. To calculate the ownership percentage and establish the market value, outstanding shares play an important role.

Apart from all these, it is advisable to be clear about the roles that each of the shareholders plays. Remember, dedicated work and contribution are as much as necessary as your financial investment when taking steps for an ownership percentage. Know that, this percentage represents both your ownership in the company and the share of profits you will receive both now and in the future.

In order to calculate the ownership percentage, fractional investment requires these steps to follow:

• Identifying the Total Shares Outstanding: This includes taking into account the total number of authorized shares and share equivalents issued by the company. This is becomes the denominator.

• Identify the Investor’s shares: Determine the number of fractional shares or share equivalents the investor is holding, which is the numerator of the calculation.

• Calculate: Lastly, divide the total number of shares outstanding by the number of investors’ shares, and then multiply the result by 100 to get the result of the ownership percentage.

Let’s give an example, if a company possess authorized shares of 1000 and an investor purchases 50 of the fractional shares, the ownership percentage is to be calculated as

(50 / 1000)* 100= 5%.

Thus, the ownership percentage in this case would be 5%. Though, it is necessary to note that specific calculations might vary based on the terms of fractional investment arrangements. For a better understanding of how fractional ownership works in the world of investment, it is recommended to consult legal and financial professionals to determine accurate calculations.

How to select fractional home ownership?

With an eye towards attaining fractional real estate investing in India, you should be careful before choosing the firm or the platform of fractional investment. It is advisable to select the best-skilled firms, the ones with the best connections who could serve their clientele with the best possible negotiations. Listed below is how selecting the best firm could be potential profits for you:

• Be certain to research any investment platform before investing. Research for the best reputed fractional investing platforms.

• Try to make a list of the best fractional investment firms and compare all the top five best or ten best with each other. Consider a few things like their features, fees, reviews etc.

• Check out the asset you are interested in investing such as real estate, stocks etc. Make sure they are providing that class asset.

• Look for the security measures that the firms have taken to protect your personal plus financial information. Most importantly, check for the relevant regulations and necessary licenses to ensure investor protection.

• Have a thorough knowledge of the range of investment options offered by the firm. It is always best to choose a firm that provides diversified assets to build a better investment portfolio.

• Fees structure and costs are also to be checked of the firm. Consider the impact of fees on your potential returns and compare them across different platforms.

• Check the user experience and the accessibility of navigation on the platform. Ensure that the platform provides transparent information, convenient features and a user-friendly interface.

6 Top Platforms for Fractional Ownership Real Estate in India.

The trend of Fractional Real Estate Investment is also growing in India, and there are six real estate platforms in India that are offering fractional home ownership with the best guidance. Here are certain top fractional ownership platforms in India:

Risks Involved in Fractional Ownership Real Estate Investment.

While fractional Investment offers a way to diversify your investment portfolio with low cost for maximum returns, you must be aware of the risk behind the investment:

• Minimum Control: Having your own property in fractional investment gives you not much of an authority to do things as you wish. When you decide to own a fraction of a property you seemed to lose some control over it. Even though you can sell, or rent it out according to your wish, certain limitations and restrictions may be imposed, affecting your ability to make independent choices.

• Co-owners as strangers: In Fractional real estate investment, you will come across many buyers or co-owners whom you don’t recognize but you become partners in sharing a particular property. Trust issues and disagreements rise which might become the pain point of the investment.

• The risk of income volatility arises from fractional investment. The rental income becomes subject to fluctuations because of changes in occupancy rates, and economic downturns that might reasonably impact the financial performance.

• Risk in fractional real estate investment can also be due its property-specific factors, which include locations, market demand, environmental concern etc. that lead towards unstable property returns which influence its performance and returns.

Case studies: Examples of successful Fractional ownership real estate Investment.

In 2017, Drew Strerrett, an analyst at asset management firm Tungsten Partners, recognized the challenge of high-entry costs in real estate investment market. To address this, he co-founded LEX for easy accessibility of real estate assets. LEX is a New York-based start-up company offering fractional ownership in commercial buildings. This company acts as a securities broker, helping hold public offerings of shares for existing property owners, that can be traded on their marketplace.

Apart from LEX, there are other companies like Here in Miami and Vesta Equity in Toronto, which also offer Fractional Ownership in real estate, by providing opportunities for investors to diversify their portfolios and access high-quality properties.

Abhay Israni, the founder of Canopi, a leading online marketplace in India for short-term, collateral-free loans MSMEs. Since 2018, he has been an active fractional investor in PropertyShare. Till this date, he has made four successful investments through PropertyShare, all in Grade- A commercial real estate properties.

Abhay appreciates PropertyShare for its accessibility of providing Grade-A commercial properties, which allows him to invest in high-quality properties that would in general be beyond the reach of individual investors. As he praises PropertyShare for its seamless process of taking care of the legal documentation and giving peace of mind during the whole investment journey. Plus, bringing about a prosperous amount of wealth.

Impressed by his positive experience, Abhay has recognized the platform’s value of offering the best in terms of diversifying investment portfolios and gaining exposure to real estate assets. Through this, he has been able to take advantage of fractional real estate investing opportunities and enjoy the full potential financial returns and growth of it. Abhay’s endorsement highlights the appeal of the platform of PropertyShare, filling the crack between investors and fractional real estate shares.

All these above-described case studies showcases how fractional ownership works outshines the success and potential of fractional real estate investing, where exceptional innovative platforms like LEX and PropertyShare, revolutionise fractional ownership by empowering investors with attainable opportunities.

Tips for Successful Fractional Ownership Real Estate.

You should know that investment carries risk, and being a very new tool of investment, it is necessary to get a good grab of tips for successful fraction ownership:

• Before investing, conduct thorough research on the investment platform, the specific property etc. you are considering.

• Try to stay updated on the recent market trends and property value etc., this helps you make informed decisions.

• Analyise the property potential. Check out the location and other conveniences for a better understanding of the property’s potential for rental income or capital appreciation.

• Be patient with your investment because fractional investment is a long-term commitment. Therefore you must a have long-term perspective.

• Check out the best deal in the market for fractional investing in real estate. Try to compare different opportunities and negotiate the price with a fair deal.

• Try to connect with other fellow fractional investors and learn from other experienced investors. Networking and consulting with other experts give you insights into your investment goals.

Fractional real estate investment allows investors to own a portion of the property at a low cost by catering premium assets and generating a healthy amount of revenue. However, one must be aware of the risk involved with it and how does fractional ownership work in a real estate industry. In addition, selecting the right investment platform can enhance the chance of successful fractional ownership real estate investment. If necessary do not hesitate to consult a professional to make better investment decisions.

FAQs:

Q1. Can you make money in Fractional Ownership real estate investment?

Ans: Yes, indeed, you can make money in fractional Ownership by receiving feasible returns.

Q2. What is the difference between fractional ownership in real estate and REITs investment?

Ans: Fractional real estate investing enables liquidity, it allows you to sell your property when you want, but REITs don't allow liquidity, it can't be transferred or sold whenever you want.

Q3. Is Fractional Investing in Real Estate a Good Idea?

Ans: Absolutely, Yes, Fractional Investment is a great idea if you want to diversify your investment portfolio bringing about a healthy amount of returns.