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real estate investment

Rajashri

5 months ago

Explore The Types Of Models In Fractional Investing

 

Thousands of investment options, but to this day, people still prefer property ownership as the most treasured one. The days of traditional investing with colossal capital and burdensome responsibilities are far gone, as the fresh air of fractional investing with its types of models in fractional investing has stepped into the real estate market, bringing an abundance of opportunities.

No doubt, due to the constant evolution of business models, the ways of owning property have also been changing. And with the rise of digital technology facilitating fractional ownership investors can own a portion of a property instead of having to buy the whole property.

In this blog, we explore how this concept is growing with its different types of model infraction investing, and offering more flexible and accessible options for investors.

 

Overview Of Fractional Investing.

 

Imagine a case where multiple investors come together with a shared purpose to purchase a commercial property worth 20 crores. In particular, Fractional investment is the means to make this possible for investors to invest a minimum of 10 lakhs and enjoy the returns based on their respective investments.

Fractional investment allows investors to pool their funds together, thereby owning a portion of high-value properties and gaining profits from commercial properties that were previously out of reach. It is an information technology-based marketplace showcasing low ticket-size fractional properties.

Fractional ownership divides the value of the property into smaller pieces that represent different portions of ownership in the property.

 

Why Is Fractional Real Estate Gaining Popularity?

 

Many people who aspire to invest in property often find it hard to invest because of its high-cost involvement. However, the concept of fractional ownership has been gaining momentum in the real estate industry. Shared property ownership has opened doors for people to alternate ways of owning premium properties.

The main reason behind its gaining popularity is that the investors of fractional property can enjoy the benefits of it, such as receiving rental returns, and appreciation value of the property without having to take the responsibilities of full financial burden.

What makes it different from other investment options is that it becomes a passage to enter into the market of premium properties, which was not possible to attain with other traditional models of ownership. But now investors can get access to premium properties and help them diversify their investment portfolios.

Interestingly, the changing lifestyles of post-pandemic have also played a part in the rise of the popularity of fractional investment because of its flexible options in ownership. As it buys convenient properties in a shorter duration without being tied down to the full responsibilities that usually come with owning a property.

The platforms of fractional ownership have experienced a notable surge in investment volume as the concept gains momentum. By the end of 2023, in global terms of fractional ownership, it is expected to reach a valuation of several dollars emphasising a positive impact on the real estate landscape.

 

Is Fractional Real Estate Investing Related To The Stock Market?

 

One thing we must be clear about the stock market is that it is a marketplace where individuals buy and sell stakes in ownership in a traditional way, whereas fractional investment is a feature inside the stock market that allows investors to own fractions of shares to make investing more accessible and affordable.

Though fractional investment is comparable to the stock market, the concept of the stock market is different from fractional investing. As fractional investors get to choose their own property for an investigation of fractions of property, they only have to pay for a fraction of the property.

 

Importance Of Understanding Different Models Of Fractional Ownership Real Estate.

 

Various investors will find different methods of investing in real estate. Considering different types of models in fractional investing before an investment is as crucial as considering the process of fractional investing. When you understand the models, you grasp the various avenues and methods available for sound investment decisions. Through this, you gain insight to make informed decisions regarding your investment.

The insights of understanding the types of model in fractional investing empower you to optimize your problems creatively and adequately manage the foreseen risks. As a whole, being familiar with different types of models of fractional investment widens up the intellectual horizon of real estate investing eventually contributing to total development.

 

Different Types of Models in Fractional Ownership Real Estate.

 

In addition to different real estate assets in the market, like houses, apartments, and more you will also encounter different types of models in fractional Investing:

 

Direct Fractional Ownership Model

 

  • What is Direct fractional ownership in real estate?

 

Direct fractional ownership is a type of model in fractional investing, that deals with directly the owning physical real estate assets that present the highest substantial returns on investment. This is a traditional method of investment that entails significant responsibilities and risks as well. As an owner, you can reap the benefits of property ownership, like rental income and property appreciation.

Plus, you will have the full responsibility of managing the property, maintaining the property, and tenant relations, and addressing any other potential issues that may arise.

 

  • How does fractional property investment work in real estate investing?

 

Direct ownership lets an individual take control over the real estate properties in which they invested. Unlike other investment instruments like REITs, where overall property management is handled by the company of the REITs itself. Here in fractional property investment, the people get direct control over their assets.

Moreover, it is a concept that involves a scenario where a group firm holds majority control of more than 50% over the shares in a subsidiary company. Establishing direct beneficial ownership, in general, is easy because of the transparent organisational structure and the legal assistance of the companies involved. Holding more than 50 % of the shares in the company means it directly owns the shares of the c company.

It is a crucial aspect of an individual’s investment strategy as it allows key advantages such as diversification of the investment portfolio, stable cash flow, long long-term capital appreciation that helps an individual build a solid wealth structure over time.

 

  • Benefits and considerations of direct fractional ownership:

 

This type of model in fractional Investing has various benefits that help an individual experience the best of the investment world. However, alongside these benefits, we must also consider some of the risk factors that come along with it.

 

Let’s take a closer look at the benefits of direct fractional ownership:

 

  • No doubt, this direct method of fractional real estate investing assures potential financial stability. It creates a passive source of income that allows an individual to derive earnings from the rental payments.
  • Reducing tax liability is another benefit that one holds from this type of model in fractional investing. Direct fractional ownership provides tax benefits like deduction of mortgage interest, depreciation etc.
  • The best part of direct fractional ownership is its control power over the property. Individuals enjoy full autonomy of the property starting from management to its maintenance of it.

 

Risks and considerations we are supposed to look for in direct fractional investing:

 

Though direct fractional ownership gives a considerable amount of advantages, it is necessary to be mindful of the risk and consideration as well for potential returns:

 

  • The advantage of managing the property independently can backfire on you. The management of the property can be considered risky because proper management of a property needs an ample amount of time, effort and expertise. The owners must be ready to face any disputes that come along with the tenants and property.
  • Direct real estate ownership is prone to vacancies and turnovers of tenants, which would result in a loss in potential income and a rise in expenses in property management. In order to mitigate the risks associated with it, one should choose their tenants carefully and address the issues of management properly prioritizing tenants satisfaction.
  • It is necessary for direct owners to understand the local market conditions, like the population trends, and job growth as well. This strong impression of understanding the market can maximize your returns and minimize your risks.
  • Real Estate is an illiquid asset, the investor might face challenges when wanting to access their capital during an emergency.

 

Real Estate Investment Trusts (REITs)

 

  • Definition and purpose of REITs

 

REITs stands for Real Estate Investment Trusts, which represent a type of model in fractional investment that enables people to invest in big-ticket properties that are already producing income. REITs are a kind of companies that work like mutual funds, that own, operate or finance big real estate properties or commercial properties.

It allows investors to pool their money together in income-generating properties like offices, malls, apartments etc. and in return recieve a magnificent amount of money as rental fees.

The main purpose of Real Estate Investment Trusts does not stand for building properties and setting them out for sale. Instead, REITs purchase properties and help them develop as an investment. REITs offer the best chance for the investor to invest with a minimum amount, and earn passive income from these real estate ventures without needing to manage everything by themselves.

 

  • Structure and operation of REITs

 

The guidelines of Real Estate Investment Trusts were introduced by SEBI in 2007, which was recently updated in 2014 with various modifications. The recently updated guidelines of REITs aim towards providing a legal regulatory framework investment in REITs. At present, there are only three REITs in India, that are approved for operating in commercial real estate - Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust.

 

The structure of REITs is typically followed by these key entities:

 

  • Sponsor: The sponsor is usually the builder or the developer, who establishes the REIT and contributes the property to the trust.
  • Trustee: The trustee is someone who is appointed by the sponsor and holds the assets on behalf of the investors or the unitholders. He is the one who looks after the management of the trust.
  • Manager: The manager is appointed by the trustee who is accountable for managing the assets and making informed investment decisions.
  • Unitholders: Unitholders are the investors or beneficiaries of the trust, who purchased units of REIT.
  • Independent Valuer: Besides the sponsor, manager, and trustee, a reliable independent valuer is assigned to access the value of REIT’s assets periodically.

There are other supporting entities involved such as auditors, registrar transfer agents, etc. to assist the operation properly.

REITs also can be bought directly by the trust itself or through a special-purpose vehicle or holding company with particular ownership requirements. This structure enables investors to invest and earn passive rental income from the assets.

 

Advantages and potential risks of investing in REITs

 

Certainly, REITs hold a significant role within the investment portfolio as they offer a wide range of advantages like:

 

  • Diversification of your investment portfolio. Here, an investor is exposed to various real estate opportunities without owning and managing properties.
  • Make bigger returns on small investments.
  • REITs are a type of model in fractional investing where the investors don't have to take the burden of managing the properties as REITs provide professionals who handle all the operations of management and maintenance.
  • Passive income opportunities. The centre of attention of REITs is it offers regular income through dividends from rental collections of the properties.

 

However, potential risks associated with REITs investment include:

 

  • You will find very few REITs available in India, which leads to limited investment opportunities.
  • Wanting to sell REITs can be challenging due to their low liquidity feature. The limited market participants in the investment sector backlash against low liquidity.
  • Another risk of REITs is their taxable dividend. The dividend income received from the REITs is totally taxable, reducing returns for higher tax bracket investors.
  •  

Crowdfunding Platforms

 

Crowdfunding is also another type of model in fractional investing that gathers funds for real estate properties by collecting a small amount of contribution from people. This platform connects the owners and various investors through online marketplaces. Crowdfunding facilitates one to enter into the real estate market with small initial investment, diversify their real estate portfolio and thereby grow their wealth through property ownership and rental income.

 

  • Introduction to real estate crowdfunding

 

Real estate crowdfunding empowers common people to financially support new companies and real estate projects by making minimal online contributions. The investors or the common people pool their money together to participate in various real estate properties such as residential or commercial holdings.

This new strategy of investment provides diversification of investment portfolios, and risks that are shared, and opens various investment opportunities, and proper visibility of market without having to personally maintain it or mortgage payment. In contrast to traditional investment features, crowdfunding lets individual investors invest in a wide range of properties and projects as well, without needing any physical loan guarantees.

 

Different types of crowdfunding models

 

  • Equity-based crowdfunding:

 

Equity-based crowdfunding is a type of crowdfunding where the investors are given an opportunity to hold an ownership stake in real estate properties, offering them shares in profits and future returns when the properties are sold. Although it offers the promise of higher returns, it carries more risks and demands a longer time horizon in investment.

However, this form of crowdfunding is employed for larger and more intricate projects such as commercial properties. However, evaluating the investment prospects and the sponsor’s track record is necessary to make sound investment decisions.

 

  • Debt-based crowdfunding

 

Unlike, equity-based crowdfunding,debt-based doesn't confer investors the ownership stake. Debt-based crowdfunding refers to investors lending financial support to real estate builders or developers by providing loans for their projects and getting interested in returns. This platform of crowdfunding receives interest from the provided loan as the borrower repays the loan with the interest.

Moreover, it is considered a conservative way of investment strategy as the level of risk is lower than equity-based crowdfunding. Specialised for investing in small-scale residential projects this process of crowdfunding caters for an extensive range of various investors.

 

  • Donation-based crowdfunding

 

Donation-based crowdfunding is a type of crowdfunding where small amounts of money are collected for a particular property or project from people or contributors. In short, they ask for donation money for a specific project. In addition, the backers receive tokens as their rewards which increases it value as equal to the donation size. This occurs in only large amounts of donations.

It is also known as reward crowdfunding as it offers tokens, like pre-sales from with the funds raised. As this form of crowdfunding is based on donation, the investor doesn’t get any ownership stake or any rights over the project or the property, instead gets rewards as a token.

 

Pros and cons of investing through crowdfunding platforms

 

Pros:

 

  • The platform of crowdfunding makes investment in real estate more convenient for people. It makes investment options easily accessible to investors in a wide range.
  • When compared to other investment platforms, crowdfunding has lower fees and the investment requirement is minimal to other traditional funds.
  • Diversification of your investment portfolio is another benefit you acquire when you get into a crowdfunding platform.
  • Buying and selling your property through secondary markets become easy when you invest in crowdfunding platforms.

 

Cons:

 

  • The investors don't have any control over the property they invest in. The management of the property is totally handled by the crowdfunding platform.
  • If the property doesn't perform well there is a chance that you might lose all your investment.
  • Being a new strategy in the investment industry, the platform of crowding might still have some loopholes with unforeseen risks because of its lack of regulations.
  • Market volatility can also be a risk as unlike other investment options, this investment also depends on market conditions and economic changes.

 

Real Estate Syndications:

 

When juxtaposed with other alternative options of investment, Real estate Syndication is relatively new in the industry of real estate. However, its presence in the market has brought significant awareness and interest in real estate investing.

 

Overview of real estate syndications

 

Real Estate Syndication is a partnership investment where various investors come together to invest in a single property or project. The investors collectively raise funds to acquire large capital properties like commercial spaces for offices, which provides lucrative opportunities to have access to properties that become challenging for an individual investor to acquire.

Property syndications are also acquired by various means, such as through the platforms of crowdfunding that cater to group investments or by privately forming a syndication agreement with accredited investors. This type of model in fractional investing brings forth a collaborative approach that provides a great potential income for investors.

 

The sponsor and the investors are the two main players involved in real estate syndications:

 

  • Sponsor: The sponsor of real estate syndication plays a very crucial role in the investment process, as they are thrones who identify, acquire and manage the invested property within the syndicate. They are also known as General Partners.The sponsor presents their overall knowledge and expertise to make the project successful and profitable. Sponsors are also known as syndicators.
  • Investors: Investors are those who provide capital to the GPs.There are two types of investors in real estate syndications. One is an Active Investor and the other one Passive Investor. They are generally passive investors who supply money as much as they want to and collaborate with GP and LP to understand the ins and outs of investment.

 

Roles and responsibilities of syndicators and investors:

 

Syndicators:

 

  • Sponsors do the suitable findings of investment properties that match the goals and objectives of syndication. They are responsible for identifying and acquiring investment properties.
  • They arranged the necessary financing and invited equity partners who were willing to contribute to the investment. Also, negotiate when needed.
  • Sponsors are the ones who oversee the property management system. Check whether the property is managed properly including tenant and rental management.
  • Sponsors coordinate with professionals in real estate such as brokers, consultants,p property managers etc for the smooth running of the investment.

 

Investors:

 

  • The investors are responsible for collecting a bulk of capital in order to invest in the project.
  • They contribute to supporting the GPs by providing them with the necessary capital requirements for the smooth functioning of the investment.


 

Advantages and potential drawbacks of real estate syndications

 

Advantages:

 

  • Real estate syndication allows you to diversify your investment portfolio.
  • You can easily get access to big-ticket properties in the real estate community with lower minimum investment.
  • Certainly, you will be provided with a professional management system that oversees the property.
  • If you are investing passively as limited partners, the chances of benefiting from the sponsor’s expertise increase.
  • Real estate syndications are less likely to be the liable entity because they are protected by GP’s expertise.

 

Potential risks to be considered:

 

  • The chances of the investors not profiting from the investment is there, even if the sponsors attain some amount of profit.
  • Giving up their control over the asset to some extent as a trade-off because of being able to passively invest.
  • Syndication of real estate is also like other investment options i.e. illiquid.

 

Fractional Ownership Platforms

 

Fractional ownership enables individuals to invest in high-value assets such as real estate, luxury goods etc. The platforms of fractional ownership are those online platforms that allow potential investors to access opportunities that would be financially out of reach. The rules vary from platform to platform, and depending on the rules the part owners can access the properties and share profits based on their contributions.

 

Explanation of fractional ownership platforms

 

Fractional ownership platforms allow you to own a portion of all those high-value assets. For instance, a group of individuals can own a vacation villa, with each one having the right to use it and gain profits from it. The co-owners can wish to rent it out whenever they want it or use it for themselves as they please. The costs related to the property are also shared among the owners.

You might get confused fractional investment with Timeshare ownership as they might share some similarities. Timeshares are owned by large corporate companies and have limited time of usage, but fractional ownership allows an investor to be a partial owner and has no time of usage.

 

Examples of fractional ownership models

 

Luxury vacation properties

 

It is a fractional ownership model, where investors come together to collectively purchase vacation properties that are expensive. The co-owners can enjoy benefits from the property and have the right to use the property for a specific period of every year. Fractional ownership of luxury vacation is popular among those who seek to enjoy their holiday in an exclusive vacation spot in an exclusive vacation home without owning that particular home. The property could be rented out when it is not used by the investors.

 

Commercial properties

 

Fractional ownership of commercial properties and their demand have been rising because of the potential benefits that one receives. Just as vacation properties, commercial properties are also divided into shares to be invested by multiple owners. Each of the investors gains profit from becoming partial owners of the property. Property like office buildings, shopping malls, warehouses etc. are some commercial fractional property.

 

Benefits and considerations of fractional ownership platforms

 

Pros:
 

  • One can own a fraction of property that would be difficult to buy as it might be too expensive to buy outright.
  • Unlike other traditional investment methods, fractional property owners can actually make use of the property they’ve owned.
  • With the increase in property value, the fractional shares might also rise.
  • As compared to timeshares, fractional shares can be easily sold.

 

Cons:

 

  • For fractional investment getting fractional ownership is difficult, which means it becomes more expensive to buy a part of the property upfront than a regular down payment.
  • Being an existing arrangements place, the fractional owners can't manage the property themselves or get another property management company for its management.
  • The fractional property might be tied up restricting the owner's travel options as they might feel obligated to use the invested property. It might also be difficult to rent it out which adds constraints on their travel choices.

 

Tokenization and Blockchain-Based Models:

 

Blockchain is an avant-garde technology that has shaken the world of finance with its transformative features like decentralization, transparency, and immutability. Moreover, it made things more interesting and effective by introducing asset tokenization and making it more accessible and secure by providing assets with some kind of digital passport.

 

Introduction To Tokenization In Real Estate.

 

The Blockchain Council defines tokenization as "the process of transforming ownerships and rights of particular assets into a digital form."

Tokenization and Blockchain-based is a type of model in fractional investing, that deals real estate investing with Digital Ledger Technology (DLT) and smart contracts. This is a new and unconventional method of fractional real estate investing that has combined characteristics of both REITs and fractional ownership.

Tokenization involves breaking property into several fractions and thereby each of the fractions is represented as a digital token registered on the blockchain. These provide transparency and safeguard the records of the ownership transactions.

Here, the investors can easily trade the tokens and earn potential incomes through rents and consequently make profits from it. These tokens are transacted with smart contracts making transactions easy and cost-effective.

 

How does blockchain technology enable fractional investment?

 

Blockchain technology and real estate together enable fractional ownership. Fractional Investing allows investors to own a fraction of large commercial property. Real Estate tokenization is a technological process of digitally fractionalizing real estate property into tokens that are stored in a decentralised database called as a blockchain. These blockchains gather information like a digital ledger where all the distributed ledgers of real estate tokens are verified and shared among the participants, ensuring transparency records of transactions.

Real estate tokens can be compared to NFTs i.e. Non-fungible tokens, which are those data stored on the blockchain that is non-interchangeable units of data that can be traded. Even if they are like NFTs, real estate tokens are connected to the value of physical assets. These tokens are represented as fractional ownership and other various aspects of real estate like ownership of the real property, ownership of the entire real property, equity in a property controlling entity etc.

REITs and real estate tokens differ from each other as Real Estate token provides a specific investment related to a single real property. These digital real estate tokens are formed and registered on the blockchain through a security token offering, where each of the fractional properties is converted into a token and later on grants encrypted ownership. Through this investors can instantly transfer ownership at a relatively low cost on digital marketplace.

The real estate assets could be divided into digital tokens through tokenisation, where investors can buy and sell these tokens based on blockchain platforms.

 

Potential advantages and challenges of tokenization models

 

Advantages

 

  • Tokenization enhances the chances of greater liquidity of assets, making it easy for individuals for buyers and sellers to successfully execute transactions on a blockchain platform.
  • Higher accessibility of assets due to dividing property into smaller tokens allows the investors to purchase small shares at a low cost.
  • The prime advantage of tokenization is Immutability, as the stored data cannot be changed, assuring exact and verified information with transaction records.
  • No intermediaries: The use of smart contracts and immutability helped with the need for intermediaries for the smooth operation of the process.
  • One of the best advantages of tokenization is that it provides transparency by registering the holder’s details in the contract and keeping everything clear record of ownership.
  • Cheaper and Faster Transactions: Automated transactions using smart contracts lead to faster and cost-effective processes, benefitting various sectors.

 

Pros of tokenized real estate:

 

  • Being a new evolving investment strategy the tax and regulations of digital tokens might create uncertainties for investors.
  • Getting scammed in the tokenized market is very popular.
  • The risk of cyber security is higher as the presence of hackers targeting digital transfers. The recovery option is limited once the money is stolen.
  • There are very limited numbers of real estate platforms that are based on the tokenization process. Plus, there are very few actual assets at disposal for investment in the market, restricting investment opportunities.

 

FAQs:

 

Q1) Is fractional ownership a good option for investing in CRE?

Ans: Yes, indeed, fractional ownership is a good option for investing in CRE.

Q2) Does fractional property ownership apply for buildings under construction?

Ans: Yes, fractional property ownership applies for buildings that are under construction.

Q3) What is the significant difference between REIT and fractional ownership?

Ans: In literal terms, Fractional ownership means owning a part of any property, whereas REITs is an investment kind of company that owns and manages properties, especially Commercial Real estate properties.

Q4) Can you own multiple shares in fractional ownership?

Ans: Yes, fractional ownership enables you to own multiple shares and gain profits from them.

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