20 Benefits of Fractional Real Estate Investing

Fractional real estate investing allows you to own a portion of a property without buying the entire asset. Here's a quick overview of the key benefits:

1. Lower barrier to entry
2. Portfolio diversification
3. Access to high-value properties
4. Passive income potential
5. Professional management
6. Less personal risk
7. Geographic diversification
8. Property value growth
9. Tax benefits
10. Flexible investment amounts
11. Less decision-making responsibility
12. Better liquidity
13. Management fees and expenses
14. Reliance on investment company
15. Potential conflicts with co-investors
16. Market volatility risks
17. Evolving regulatory landscape
18. Limited personal use of property
19. Complex tax implications
20. Potentially lower returns than full ownership

Quick Comparison:

Aspect	Fractional Real Estate	Traditional Real Estate
Initial Investment	Lower	Higher
Diversification	Easier	More challenging
Management	Professional	Self-managed or hired
Liquidity	Limited, depends on platform	Varies
Control	Less	Full
Potential Returns	Moderate	Potentially higher
Risk	Spread out	Concentrated

Fractional real estate investing offers a way to enter the property market with less capital, but comes with trade-offs in control and potential returns. Consider your financial goals and risk tolerance before investing.

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1. Lower barrier to entry

Fractional real estate investing makes it easier for people to buy property. Instead of buying a whole building, you can buy a small part of it.

Here's why this is good:

• You don't need as much money to start
• You can buy parts of expensive properties
• More people can invest in real estate now

Let's compare old and new ways of buying property:

Old Way	New Way (Fractional)
Costs a lot upfront	Costs less to start
Few choices	Many types of properties
Takes a lot of time	Less work for you
You manage everything	Experts manage the property, some require owners to vote and manage properties virtually

With fractional investing, you can:

• Buy part of a fancy office building
• Own a share of a vacation home
• Start with less money
• Let others handle the day-to-day work

This new way of investing helps more people get into real estate. It's not just for rich people anymore. Anyone can try it with less risk and less money.

2. Portfolio diversification

Fractional real estate investing helps you spread your money across different properties. This can make your investments safer and potentially more profitable. Here's how it works:

1. Spread out risk: By investing in different types of properties and areas, you're less likely to lose all your money if one market goes down.
2. Mix of safe and risky investments: You can choose some steady properties that make money regularly, and some that might grow a lot in value.
3. Different types of real estate: With less money needed for each investment, you can buy parts of many kinds of properties:

Property Type	Examples
Homes	Single-family houses, small apartment buildings
Commercial	Shops, offices, warehouses
Special Use	Self-storage, parking lots

4. Invest in many places: You can buy parts of properties in different cities or even countries. This helps if one area's economy gets bad.
5. Lower overall risk: By spreading your money around, you might have a better chance of making money in the long run.

Fractional investing makes it easier to own different types of real estate in various places. This can help protect your money and give you more chances to make a profit.

3. Access to high-value properties

Fractional real estate investing lets you own parts of expensive properties you might not be able to buy on your own. Here's what you can do:

1. Buy shares of fancy properties: You can own a piece of nice condos, busy shops, or pretty vacation homes.
2. Get benefits without paying full price: You share the cost with others and don't have to manage the property yourself.
3. Add high-end properties to your investments: You can invest in top-quality real estate with less money upfront.

Here are some types of expensive properties you can invest in:

Property Type	Examples
Homes	Fancy apartments, big houses
Business	Nice offices, popular stores
Vacation	Beach houses, ski lodges

With fractional investing, you can:

• Own part of a property in a good area
• Invest in different types of buildings
• Start with less money than buying a whole property

This way of investing helps you get into the high-end real estate market without needing lots of money or time to manage properties.

4. Passive income potential

Fractional real estate investing can help you make money without doing much work. Here's how:

1. Rent money: You get part of the rent from the property, based on how much you own.
2. Others do the work: Most fractional investing companies take care of the property, so you don't have to.
3. Money from different places: By buying parts of many properties, you can get money from different sources.

What you get	How it works
Regular money	Get rent payments often
No work needed	Don't have to deal with renters or fix things
Easy to grow	Can buy parts of many properties to make more money

With fractional real estate investing, you can:

• Make money from real estate without spending a lot at first
• Not worry about taking care of the property
• Get money regularly without doing much

This way of investing is good for people who want to make money from real estate but don't have time to manage properties themselves.

5. Professional management

Fractional real estate investing often comes with professional property management. This means you can invest in real estate without having to manage it yourself. Here's why this is good:

1. No landlord duties: The management company handles everything from fixing things to dealing with renters.
2. Expert help: These companies know a lot about real estate and can take good care of the properties.
3. Saves time: You don't have to do any work on the property, so you can focus on other things.

It's important to know that this help costs money. Management fees can be 10% to 25% of the rent money. For example, Arrived charges up to 25% for managing vacation rentals. These fees might seem high, but they cover many tasks that would be hard for you to do on your own.

Here's what professional management usually includes:

Task	Who does it
Fix things in the property	Management team
Choose good renters	Management team
Collect rent	Management team
Follow property laws	Management team
Give you updates about money	Management team

With professional management, you can enjoy owning part of a property without the stress of taking care of it yourself.

But it’s important to note that some platforms, like Lofty, require owners to vote with their shares on all property related decisions, including who to hire as the property manager.

6. Less personal risk

Fractional real estate investing helps protect you from some risks that come with owning property. Here's how:

1. You can only lose what you put in: With fractional investing, you're only responsible for the money you invest. This is different from buying a whole property, where you might owe more than you put in.
2. Not your problem if the property has money troubles: If the property can't pay its bills, it's not your personal problem. This helps keep your own money and credit safe.
3. Someone else handles the tricky stuff: Companies that manage these investments deal with most problems. This means you're less likely to get into legal trouble because of the property.

Here's how fractional investing compares to buying a whole property:

What's at risk	Buying a whole property	Fractional investing
How much you could lose	More than you put in	Only what you invested
Who pays the debts	You do	The investment group does
Risk to your credit score	High	Low
Who deals with legal issues	You do	The management company does

With fractional investing, you can put money into real estate without worrying as much about big risks. It's a way to invest that might help you sleep better at night.

7. Investing in different places

Fractional real estate investing lets you buy parts of properties in many different places. This helps spread out your risk and gives you more chances to make money.

When you invest in properties in different cities, states, or countries, you can:

1. Avoid losing too much if one area's economy gets bad
2. Make money from growing markets in different places
3. Balance your investments as property prices go up and down in different areas

Here's how investing in many places works with fractional and regular real estate:

What to compare	Fractional investing	Regular investing
Cost to start	Lower - invest in many places with less money	Higher - usually limited to one or a few places
Getting into expensive markets	Easier to buy parts of pricey properties far away	Often stuck with nearby or cheaper markets
Taking care of properties	Experts handle properties in different places	Hard to manage properties in many areas yourself
Spreading out risk	Split across many markets	Focused in fewer places

8. Property value growth

Fractional real estate investing lets you make money when property values go up. As the property's worth increases, so does the value of your share. This can lead to good returns over time.

Here's what to know about property value growth in fractional investing:

1. Market changes: Property values can go up or down based on the local economy and real estate market.
2. Choosing good properties: Investing in nice properties in good areas can help your investment grow more.
3. Spreading out investments: Buying parts of different properties can lower your risk and give you more chances for growth.

Remember, property values don't always go up. Look carefully at each investment chance. Think about where the property is, what kind of property it is, and how the market is doing before you decide to invest.

Some platforms make it easier to buy and sell shares quickly. This can help you make money from value growth faster than with regular real estate investing.

Here's how fractional and regular real estate investing compare:

What to compare	Fractional Real Estate	Regular Real Estate
Starting cost	Less money needed	More money needed
Investing in many properties	Easy to do	Hard to do
Selling quickly	Easier to sell shares	Takes longer to sell
Taking care of property	Experts do it for you	You have to do it
Making money from value growth	Get part of the growth	Get all of the growth

Fractional investing can be a good way to get into real estate with less money and risk. It gives you a chance to make money from property value growth without having to buy whole properties.

9. Tax benefits

Fractional real estate investing can help you pay less in taxes. Here's how:

1. 1031 Exchanges: You might be able to put off paying taxes when you swap one property for another. But it's not clear if this works for fractional property shares.
2. Property deductions: You can take off some costs from your taxes, like:
   • Mortgage interest
   • Property taxes
   • Wear and tear on the property
3. Passive income: The money you get from rent might be taxed differently than money you earn from a job.

Remember, tax rules for fractional real estate can be tricky. They depend on:

• How the investment is set up
• Your own tax situation
• Current tax laws

It's a good idea to talk to a tax expert about your specific case.

Tax Benefit	What It Means
1031 Exchanges	Might let you delay paying taxes when you trade properties
Property deductions	Can lower your taxes by subtracting some property costs
Passive income treatment	Rent money might be taxed at a lower rate

These tax benefits can help you keep more of the money you make from your investments. But always check with a tax pro to make sure you're following the rules.

10. Flexibility in investment amount

Fractional real estate investing lets you put in different amounts of money. This makes it easier for more people to invest in property. Here's why this is good:

• Start small: You can begin with as little as $100.
• Choose your amount: Invest based on what you can afford.
• Grow slowly: Set up regular payments to build your investments over time.

Regular Property Buying	Fractional Property Buying
Costs a lot upfront	Can start with a small amount
Few choices	Many property options
One big investment	Several smaller investments

With this type of investing, you can:

1. Buy parts of many properties with less money
2. Change how much you invest as your money situation changes
3. Try out real estate investing without spending too much

This way of investing helps more people get into the property market. It's good for those who want to start small or can't afford to buy a whole property.

11. Less say in investment choices

When you invest in fractional real estate, you don't get to make many decisions about the property. This can be both good and bad. Here's what you need to know:

1. Picking properties: You can only choose from what the investment company offers. For example, Lofty AI had less than 150 properties to pick from in October 2023, but all properties were available to purchase for new investors.
2. Day-to-day running: You don't get to decide how the property is managed. Experts handle things like fixing problems and dealing with renters. Lofty is again the exception here, where owners get to vote on all property related decisions.
3. Selling your share: It might be hard to sell when you want. Some companies make you wait 5 to 15 years before you can sell your part.

Here's how fractional investing is different from buying a whole property:

What you can do	Owning a whole property	Fractional investing
Choose the property	You pick any property	You pick from a small list
Make decisions	You decide everything	Experts decide for you
Fix things	You're in charge	Someone else does it
Sell when you want	You can sell anytime	You might have to wait
Use the property	You can use it	Usually, you can't use it

Fractional investing means you don't have to do the work of owning property. But it also means you can't make many choices about your investment. Think about whether this is okay for you before you invest.

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12. Hard to sell your investment quickly

When you invest in fractional real estate, it can be tough to get your money back fast. Here's why:

1. No easy way to sell: You can't sell your shares on the stock market like you can with other investments.
2. Have to wait: Many companies make you keep your money in for 5 to 15 years before you can take it out.
3. Few people to sell to: Some companies only let you sell to other people using the same service, so not many people can buy your part.

Lofty is still the exception to the liquidity problem, because they have a robust secondary market that lets anyone buy and sell instantly through “market orders”, as long as investors are ok with the prices quoted.

Here's how easy it is to sell different types of real estate investments:

Type of Investment	How Easy to Sell
Fractional Real Estate	Hard - Often can't sell for years
REITs (Real Estate Investment Trusts)	Easy - Can sell anytime
Regular Real Estate	Medium - Depends on the market

Fractional real estate can be good in some ways, but it's important to know you might not be able to get your money out quickly. Think about how long you can leave your money in before you invest. Make sure you're okay with not being able to use that money for a while.

13. Management fees and expenses

When you invest in fractional real estate, you need to know about the fees and costs. These can affect how much money you make, so it's important to understand them before you invest.

Companies that offer fractional real estate investing charge different fees:

Fee Type	What It's For	How Much It Might Be
Listing fees	Adding a property to the platform	Depends on the company
Management fees	Taking care of the property and paperwork	Up to 25% of the rent money
Selling fees	When you want to sell your part	Depends on the company

These fees can lower the money you make from your investment. For example, if you invest in a vacation rental, the fees might be as high as 25% of all the money the property makes. This can be a lot, especially if the property isn't making much money.

Before you invest, make sure to:

• Look at all the fees the company charges
• Compare these fees to other ways of investing in real estate, like REITs
• Think about whether the fees are worth it for what you get

14. Relying on the investment company

When you invest in fractional real estate, you often have to trust the company that runs the investment. This can be good and bad:

Good things:

• Experts take care of the property
• You don't have to find renters or fix things
• They know how to pick good properties

Not so good things:

• You can't make many choices about the property
• The company might put its needs first
• You can only pick from the properties they offer

It's important to check out the company before you invest. Look at:

What to check	Why it matters
How well they've done before	Shows if they're good at their job
How open they are about decisions	Tells you if you can trust them
How much they charge	Affects how much money you make
How they talk to investors	Shows if they care about you

15. Problems with other investors

When you invest in fractional real estate, you might have issues with other people who own parts of the same property. These problems can make your investment less enjoyable and profitable.

Here are some common problems:

Problem	What it means
Taking care of the property	Not agreeing on how to fix or improve things
Money choices	Fighting about how to spend money or deal with surprise costs
Using the property	Not agreeing on who can use the property and when (if allowed)
Selling	Not agreeing on when to sell or how to do it

These problems can hurt how well the property does and cost a lot of money if you end up in court. To avoid these issues, try these things:

1. Talk often: Keep in touch with other investors from the start.
2. Know your job: Agree on what each person should do.
3. Write it down: Use legal papers to say how you'll make choices and fix problems.
4. Get help: Think about hiring a company to run the property and help solve fights.

16. Market volatility risks

Fractional real estate investing can be affected by changes in the market. Here's what you need to know:

1. Property values can go up and down: The worth of properties can change because of things happening in the economy.
2. Money issues can affect your investment: When the economy changes, it can impact how much rent you get or how much your property is worth.
3. It might be hard to sell: If the market is bad, you might have trouble selling your part of the property.

To help protect your money, try these things:

What to do	How it helps
Buy parts of different properties	Spreads out your risk
Plan to keep your money in for a long time	Helps you ride out short-term problems
Learn about the market	Helps you make better choices
Talk to money experts	Get good advice before you invest

17. Rules and laws are still changing

When you invest in fractional real estate, it's important to know that the rules are not always clear. This can make things tricky for investors.

Here's what you need to know:

1. New rules are still being made: Laws about owning parts of properties are still changing. This means you might not always know your rights or what you have to do.
2. Investment laws apply: Buying parts of properties often falls under investment laws. This means the companies that sell these investments have to follow strict rules about what they tell you.
3. Companies need special permits: The businesses that help you buy parts of properties might need different kinds of permits to do their work.

To help deal with these unclear rules:

What to do	Why it helps
Check if the company follows the rules	Makes sure your money is safe
Learn about local laws	Helps you avoid getting in trouble
Talk to a lawyer	Get help from someone who knows the laws
Keep up with new rules	Change how you invest if you need to

Even though the rules are still changing, this shows that more people are starting to see fractional real estate as a real way to invest. As time goes on, the rules will probably become clearer, which could make things safer for investors.

18. Limited personal use of property

When you buy a part of a property through fractional real estate, you can't use it as much as if you owned it all. Here's what you need to know:

1. You can only use the property for a short time each year
2. You have to plan when you'll use it with other owners
3. It's not as easy to use as a property you own by yourself

What to compare	Owning part of a property	Owning all of a property
How long you can use it	4-8 weeks a year	All year
Planning when to use it	Must agree with other owners	Use it when you want
How easy it is to use	Not very easy	Very easy

To make the most of owning part of a property:

• Plan your visits early
• See if you can trade time with other properties
• Remember it's mostly for making money, not just for vacations

Even though you can't use the property all the time, it can be good for people who want a vacation home without all the work and cost of owning one by themselves.

19. Tax issues can be tricky

When you invest in fractional real estate, dealing with taxes can be hard. Here's what you need to know:

1. Different tax rules: How you pay taxes on your investment can change based on where the property is and how you own it. This can be confusing.
2. Possible tax savings: You might pay less in taxes because:
   • You can take off some of the mortgage interest you pay
   • You might get money back for making the property use less energy
   • You might be able to swap properties without paying taxes right away, but this is hard to do
3. Problems with investing in different places: If you buy parts of properties in different states or countries, you might have to follow more tax rules.

Tax Thing	What to Think About
Taking off costs	Mortgage interest, property taxes
Getting money back	Making the property use less energy
Swapping properties	Might be able to do it, but it's hard
Different places	Tax rules change based on where the property is

To handle these tax issues:

• Talk to someone who knows about taxes and fractional real estate
• Learn about the tax rules where your property is
• Keep good records of what you spend and earn
• Stay up to date on new tax laws that might affect you

20. You might make less money than owning a whole property

When you buy part of a property, you might not make as much money as if you bought the whole thing. Here's why:

1. More fees: Companies that help you buy parts of properties often charge extra money for their help. This can lower how much you earn.
2. Fewer properties to choose from: You can only pick from the properties these companies offer. This means you might miss out on better deals.
3. Sharing money: When you own part of a property, you have to share the money it makes with other people who own parts too.
4. Can't make big changes: If you owned the whole property, you could make changes to help it make more money. But when you only own a part, you can't do this as easily.

Here's how owning part of a property compares to owning all of it:

Owning the whole property	Owning part of a property
You make all the choices	You don't get to make many choices
You keep all the money it makes	You share the money with others
You can change things to make more money	It's hard to make big changes
No extra fees to pay	You pay fees to the company that runs things

Buying part of a property can still be a good way to make money, but it's important to think about these things before you decide.

How to Start Fractional Real Estate Investing

Here's a simple guide to help you begin investing in fractional real estate:

1. Learn about it

• Read up on fractional real estate investing
• Understand how it works and what risks it has
• Learn about different ways to invest, like crowdfunding and REITs

2. Pick a company to invest with

Look at different companies that offer fractional real estate investments:

Company	Lowest amount to start	Need to be rich?	How much you might make each year
Fundrise	$10	No	8-9%
Arrived	$100	No	3.2-7.2%
HappyNest	$10	No	6%
HoneyBricks	$1,000	Yes	Not sure
Lofty	$50	No	Depends on the property and your entry price (0-20%)

Check each company's rules, fees, and how well they've done before you choose one.

3. Decide how much to invest

You can start with as little as $10 with some companies. This makes it easy for many people to try it out.

4. Choose what to invest in

Pick the properties or groups of properties you want to buy a part of. You can often buy parts of many properties to spread out your risk.

5. Buy your part

Use the company's website to buy your share of the properties you picked. This is usually quick and easy to do.

6. Keep an eye on your investment

Watch how your investment is doing. Most companies give you tools to check on it. Remember that buying property often takes a long time to make money, so don't expect to get rich quick.

Wrap-up

Buying parts of properties, called fractional real estate investing, is a new way to invest in real estate. It has good and bad points:

Good points:

• You can buy expensive properties with less money
• You can spread your money across different properties
• You might get money from rent without doing the work

Bad points:

• It can be hard to sell your part quickly
• You don't get to make many choices about the property
• You might not agree with other people who own parts of the same property

The money you make depends on how the real estate market is doing and how good the company running things is.

Before you start:

1. Look into different companies and how well they've done
2. Check how much they charge and how much you might make
3. Think about how much risk you're okay with and what you want to achieve
4. Buy parts of different properties to spread out your risk
5. Keep learning about the real estate market and new rules

What to do	Why it's important
Research companies	Find a trustworthy partner
Understand fees and returns	Know what you're paying and what you might earn
Know your risk level	Make sure you're comfortable with the investment
Buy parts of different properties	Lower your risk
Stay informed	Make better choices as things change

FAQs

Are fractional properties a good investment?

Fractional real estate investing can work well for some people, but it's not for everyone. Here's what you should think about:

Good things	Not-so-good things
Costs less to start	Hard to sell quickly
Can buy parts of many properties	Can't make many choices about the property
Can buy parts of expensive properties	Might not agree with other owners
Can make money without doing much work	Have to pay fees to the company running things

Fractional real estate investing might be good for you if:

• You want to add real estate to your investments
• You don't have a lot of money to start
• You're okay with sharing decisions with others
• You don't need to use the property yourself

Before you invest, make sure to:

• Look into different companies
• Understand how much they charge
• Think about how much risk you're okay with

Fractional real estate can make you money and help spread out your investments. But it also has some problems that might not work for everyone. Make sure it fits what you want before you put your money in.

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