What is Fractional Real Estate/Fractional Ownership?

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Many individuals dream of owning a home and work hard to save enough money to buy one. It could be a vehicle or a piece of real estate. However, it may take years for a person to accumulate the required amount.

Would you like it if you could obtain ownership of a property/asset in a more straightforward and cost-effective manner? What if you could own a part of the property and yet get a return on your investment?

Home fractional ownership is a novel technique to acquire a property that you have been eyeing for some time. Here are all of the facts concerning fractional ownership that you need to know.

Fractional Ownership

A fractional ownership structure is one in which a group of investors combine their funds to purchase a property. They both have passive ownership of a valuable item. This method lessens the financial load on a single investor who owns a property while also allowing the investor to make returns on the investment.

A commercial property, a residential home, a plane, a yacht, or even a warehouse can all be considered assets in this context.

Based on their investments, all investors will share the income and expenses associated to such assets in the appropriate proportions.

Assets leased by corporations, such as vehicles, equipment, and furnishings, have recently followed the trend of fractional ownership. These assets can be purchased for as little as Rs.20,000. Furthermore, the initial investment for fractional ownership of commercial property can be as low as Rs.5 lakh.

When it comes to commercial property, the fractional ownership ritual is carried out via a Special Purpose Vehicle (SPV). SPVs are used to obtain financing for the purchase and management of real estate. In this situation, an investor will possess shares in the SPV that owns the property.

Why is fractional ownership becoming more popular?

For assets that are less liquid, harder to administer, or unaffordable to small investors, fractional ownership is the best option. The cool factor is the primary reason for this concept’s popularity.

Owning a plane, a yacht, or any other high-value possession might help you present yourself in a better light. People are following this trend since it provides a larger image without requiring a large expenditure.

Furthermore, the entire amount invested in obtaining fractional ownership is allocated to net distributable cash flows. As with other types of investments, the fractional ownership corporation does not levy any fees on your investment. However, a small, acceptable price for the services may be levied.

This type of investment becomes more steady over time and is an excellent choice if you have a medium-to-long investment horizon. Typically, money is built up over 5-8 years before being sold. If you want to pay out your investment before this time period has passed, you can do so by selling your share.

What should you be aware of when it comes to fractional ownership?

As with bonds or shares, fractional ownership of assets does not ensure income predictability. In this field, the chances of meeting a con artist and being duped are high.

Keep in mind that the value of physical assets depreciates with time and is subject to wear and tear. For investors to profit from their investments, the income from such an asset must be greater than the cost of maintenance.

As a result, it is critical to understand the nature of the asset you are investing in, its lifespan, maintenance costs, revenue generated from the asset, and similar details ahead of time.

Is there a link between fractional ownership and the stock market?

As an analogy, fractional property ownership is extremely comparable to stock market investing. The investor has the option of selecting which property to own in fractions. However, in practise, the concept does not correspond to the stock market.

Investors may use fractional ownership as a means of diversifying their portfolio.

Possible fractional ownership models

You can select the correct model for your asset from the available possibilities based on the type of property, the tax treatment relevant to the corresponding model, and the model that is the most economical and convenient.

Here are some examples of fractional ownership models.

Shared ownership

In this approach, all of the owners own the property and have the right to use it without jeopardising (harming) the rights of the other co-owners. One co-owner may sell their shares in the property with the permission of the other co-owners. There is no agreement between the co-owners on “first refusal.”

Different ways to use fractional ownership

When it comes to co-ownership, each member may have different views for how to use the asset at hand. As a result, the first thing fractional owners can do after purchasing an asset is to agree on how to use it.

There are two primary methods for allocating usage rights:

1. Pay-to-use approach:

  • To use the property or asset, co-owners pay a use fee computed on a daily or weekly basis.
  • The usage fee and rental money are utilized to cover expenses.
  • If there is a surplus, it is split between the co-owners.
  • If there is a deficit, all co-owners contribute to meet the costs.
  • Each co-investment owner’s might be based on their budget, investing aspirations, and other variables.
  • The investment proportion has no effect on the usage rights.

2. Usage assignment approach:

  • Each owner is given the sole right to utilise the property for a set number of days each year.
  • The usage time can be fixed, variable, or a combination of the two.
  • During a co-usage owner’s period, the co-owner may use or leave the property as they see fit.
  • Each co-purchase owner’s price and usage rights must be proportionate.

The concept of fractional ownership of properties/assets is still in its infancy but is gaining traction. The government has yet to issue tax regulations for this notion. When it gathers traction and runs across any complicated issues, the government may devise a remedy and tighten the rope.

Fractional Ownership Vs. Real Estate Investment Trust (REIT) – Which is More Beneficial?

Investment and risk are inextricably linked. There is no way to guarantee that your investment will carry no dangers over time and will fill your pockets with large sums of money. You may, however, constantly study the market, observe current trends, and get expert opinion on how the real estate sector might appear in the next years. Commercial Real Estate is currently in high demand due to its ever-increasing market value. CRE, on the other hand, has constraints, such as the large capital amount that regular investors cannot afford. As a result, CREs were only available to High Net Worth Individuals (HNI).

However, with the emergence of concepts such as REITs and fractional ownership, a regular citizen can acquire a portion of CRE and benefit financially from monthly rental revenue or interest on the security deposit amount. But how do REITs and fractional ownership stack up?

REITs (Real Estate Investment Trusts) are similar to mutual funds. Similarly to how mutual funds pool money to make investments such as government bonds, direct equity, stocks, and so on, REITs pool money to invest in profitable real estate on your behalf. Such assets are leased to businesses, and the part-owner receives their share of the capital. However, REITs do not provide you the option of selecting the property in which to invest.

Fractional real estate investing, on the other hand, occurs at your discretion. First, fractional ownership platforms list CRE properties that investors can view. The minimum ticket size or fractional real estate investment is then determined depending on the market price of each property. Finally, you can select how many servings you wish to own based on the ticket price. Consider this: if there are a total of ten tickets available and you opt to purchase two of them, you now own 20% of the property and receive a portion of the proceeds.

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