How Does Fractional Investing Work in Real Estate?

Key Takeaways of Fractional Investment in India

Investment Options: Properties range from luxury villas and commercial spaces to agricultural land and student housing, catering to varied investor preferences. Ownership Structures: Popular options include Direct Ownership (through LLCs or TICs), REIT-like structures, and Developer-driven models. Regulations: Currently, SEBI is proposing a framework to regulate fractional real estate platforms, ensuring investor protection and market stability.

Real estate segments have always attracted investors due to the high returns it offers. However, the soaring prices of the sector have made real estate investment still a distant dream for many investors, especially beginners. For them, fractional ownership in the real estate sector works better, because it does not need hefty initial investment. This investment model is growing popular since it opens doors to all levels of investors. 

However, before you start investing in this sector, it’s important to explore how real estate fractional investments work. This piece provides insight into the ins and outs of fractional investment and how it operates, focusing especially on the Indian context.

 

How does Fractional Real Estate Investment Operate in the Indian Market?

Fractional/part investment allows inventors to co-own a property, that is plush, high-end, and offers potential earning opportunities. It’s great for investors without capital for sole ownership. Basically, it democratizes real estate investment to a great extent while making people afford luxury property in a prime location. Plus, it gives ample opportunities to diversify investment portfolios. 

Investment in the fractional ownership model comes with six steps. The market itself works in that model. 

1. Selection of the FOP:

There are plenty of fractional ownership platforms that operate in the Indian market. However, focus on choosing a reputable platform that aligns with regulatory compliance, has a successful track record, and operates exclusively in the Indian market. Often investors tend to choose the platforms that offer low transaction fees, but considering the costs should not be the parameter of selection. After all, reputed platforms offer protection from data breaches and also provide authentic information.

2. Selection of the property:

Choose a property based on the location, type, rental income potential, and projected appreciation. Evaluate the pros and cons as well as the background story of each property before you invest in it.

3. Investment Amount:

Consider the minimum investment threshold and the number of shares coming within it. Second, assess your risk tolerance, and after a careful evaluation of all these factors, decide on the investment amount. 

4. Purchase & Ownership:

Becoming a co-owner is different from being the owner of an entire property. Fractional ownership comes with its own set of regulatory norms thoroughly outlined in a legal agreement.

5. Management & Income:

Obviously, you are looking for investment opportunities from your fractional investment. But, you need to know who is going to manage all these things. Make sure that you are offering regular updates to your co-owners regarding tenant management, rent collection, maintenance, and others. Also, the rental income will be shared between co-owners.

6. Exit Strategy:

Consider the exit strategy carefully. Like other investment platforms, the FOP of your choice will provide a secondary market to you by providing a buy-back program.

Also Read: Benefits and Risks of Fractional Ownership in Real Estate

 

Who are the Ideal Candidates for Fractional Ownership Investment?

While it caters to a diverse spectrum of investors, there are some specialized categories of investors who are directly benefited by this model. Here’s a list of the people who are ideal for fractional ownership.

First-time investors:

First-time investors with low capital gain exposure to real estate investment through fractional ownership. It helps them understand the requirements of real estate as well as the professional management of the platform.

Investors seeking diversification:

Investment diversification is a great way to avoid getting in hot waters during a market crash. With fractional investment, they can add a unique asset class to their portfolio, while spreading the funds to mitigate risks as well as yield high returns.

Busy professionals:

Extremely busy professionals who are interested in making investments and earning a passive income without taking the hassles of direct property management.

NRIs:

NRIs who are interested in wealth building in their own country but do not want to bear the hassles of property management.

Also Read: REIT vs Fractional Ownership of Property

 

Real Estate Fractional Ownership Structures: Unveiling the Options

Fractional ownership isn’t a one-size-fits-all model. Different structures cater to varying investor needs and preferences. Let’s explore some common types:

1. Direct Ownership:

• This structure involves owning shares directly in the property, typically through a Limited Liability Company (LLC) or Tenancy in Common (TIC) agreement.
• Offers the most control and voting rights but also carries greater responsibility and potential management complexity.
• Suitable for experienced investors comfortable with shared ownership dynamics and actively participating in decision-making.

2. REIT-like Structures:

• Conceptually these are aligned to Real Estate Investment Trusts (REITs). In this arrangement, the investors acquire their shares ( buying their shares) through a pooled investment vehicle that comes with multiple fractionalized properties.
• Provide ample scope for passive income yet with less control of the owner in the property. 
• There are hands-off investors who are constantly looking for diversified plans as well as high returns.

3. Club Deals:

• This model involves a group of investors forming a private investment club specifically to acquire and manage a single fractionalized property.
• Offers greater control and potential for higher returns but requires active participation and agreement among all members.
• Suitable for experienced investors comfortable with collaboration and shared responsibility.

4. Developer-Driven Models:

• Many developers are now launching fractional ownership options for their new projects, offering pre-defined shares with standardized terms and management services.
• Provides immediate access to newly constructed properties but with limited flexibility and potentially higher fees.
• Suitable for investors seeking convenience and access to new developments.

5. Hybrid Models:

• Some platforms offer hybrid models combining elements of different structures, such as direct ownership with professional management services.
• This allows for customization and caters to a wider range of investor preferences.
• Carefully evaluate the specific features and fees associated with each hybrid model.

6. Choosing the Right Structure:

There’s no one-size-fits-all solution. The best product is the one that is aligned with your investment goals, risk tolerance, and the level of control you demand. Consider factors like:

• Control: How much influence do you want over property decisions?
• Transparency: Does the structure provide clear ownership documents and financial reporting?
• Fees: Compare management fees and potential exit costs across different platforms.
• Liquidity: Can you easily sell your shares when desired?
• Your experience: Are you comfortable with shared ownership and potential management responsibilities?

Also Read: How to Start Fractional Investment in Real Estate

 

Final Thoughts: Building on a Strong Future

Fractional ownership in India arrives as a boon for investors constantly seeking accessibility, diversification, and passive income potential. However, at the same time, it’s crucial to consider the potential drawbacks while having such high hopes. Last but not least, several points should be taken into account- platform reputation, regulatory compliance, and individual circumstances before making any decision. In fact, it’s up to you how you will manage your investment and build a robust investment portfolio.

Read Also: What is Fractional Investment