REIT vs Fractional Ownership of Property: Which one is Better for Investment?

Investing is a complex task, and investing in the right asset is more complicated. It becomes a tough job because most people lack basic investment knowledge. But one place where every person wants to invest in is real estate. People even opt for loans to invest in properties, commercial and residential, as they believe it is the best way to secure their financial future. In this article, we will learn about ownership investment, particularly REIT vs Fractional Ownership.

When it comes to investment in properties, people consider investing in commercial real estate (CRE) rather than residential properties, as it provides higher returns. However, CRE requires more investment as compared to residential properties. 

Initially, investing in CRE properties was a game only for HNIs/UNHIs, but the introduction of Real Estate Investment Trusts (REITs) and Fractional Ownership has put CRE properties in an affordable segment.

Another thing that may come to your mind is which one is better.

Investors often find themself in doubt while thinking about REIT vs Fractional Ownership of Property. Fractional Ownership and REITs will allow investors to buy premium rental income to earn monetary benefits through their monthly rental income and secure long-term wealth.

What are Real Estate Investment Trusts (REITs)?

REITs or Real Estate Investment Trusts allow investors to buy real estate without owning it like residential complexes, commercial buildings, or infrastructure projects. These are publicly traded companies that own, operate, and finance income-generating real estate. 

It gives investors opportunities to participate in the real estate market with low investment amounts. The Securities and Exchange Board of India (SEBI), which regulates the securities market, established the minimum investment in REIT India, which differs from REIT to REIT.

REIT pools collect funds from different investors, offer them diversification, and income distribution and also allow booking profit from property value appreciation.

Now we know about REIT and time to move to another part of the differences between REIT vs real estate fractional investment.

Also Read: How to Start Fractional Investment in Real Estate India

 

What is Fractional Ownership?

Fractional Ownership is a concept where multiple owners own a share or part of property collectively. Instead of investing in the whole property, they invest in the part of it. 

It allows them to leverage the benefit of property ownership; its appreciation and rental income without complete ownership.

In short, fractional ownership is investing in vacation property or high-value assets which is costly for individual ownership. Now you are aware of both REIT vs Fractional Ownership.

Difference Between REIT vs Fractional Ownership of Property

To help you understand both REIT vs Fractional Ownership, we will do a comprehensive analysis that will help you with your investment decision.

Real Estate Investment Trusts (REITs) leverage investors by purchasing shares in a company owning a portfolio of income-generating properties. Apart from this, it gives real estate market exposure with low investment thresholds and high liquidity through trading in public stocks. 

On the other hand, fractional property pools resources with other investors to purchase property collectively. It gives direct ownership and control over the asset, but it needs high investment and offers low liquidity as shares are not traded on public markets.

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

REIT vs Fractional Ownership

Get to know everything about REIT vs Fractional Ownership:

Comparison Points	Fractional Ownership	REITs
Type of Property	There are no constraints in property type in Fractional ownership, hence investment can be done in both under or fully-constructed properties.	As per SEBI guidelines, 80 percent of investment should be done in developed and income-generating properties.
Choice of property	Investors have complete control in choosing the property.	It offers no control to choose the property as management takes this decision with due diligence.
Lock-in period	There is no lock-in period in fractional property and investors are free to sell their property anytime.	REITs come with market value fluctuations of the company. Investors can make a profit by selling the property at higher prices.
Earnings Distribution	The income earned from the property is distributed through SPVs at regular intervals.	REIT earnings will be distributed in dividend form with a payout ratio of 90 percent.
Ownership	Partial property ownership is acquired.	No ownership is acquired in the property.
Transferability	The ownership is transferable.	The ownership cannot be transferred.
Diversification of Portfolio	Investors can diversify their portfolios.	Investor money in REITs will be invested in a set portfolio created by the company.
Entry Cost	Entry costs are higher as compared to REITs.	The entry cost is cheaper as shares are listed on the stock exchange.
Valuation Requirements	Require continuous valuation at frequent intervals.	Requires complete valuation at least twice a year.

 

Also Read: How to Diversify Your Investment Portfolio in India