With the cost of borrowing money rising and the value of each dollar stretched to its breaking point, many individuals interested in investing in commercial real estate are having second thoughts. The rising bar to entry and the lack of capital can make it challenging to invest, even in distressed properties. However, there is an alternative approach: fractional ownership. By investing as a group, individuals can participate in commercial real estate investments that would otherwise be out of reach.
What is Fractional Real Estate?
Fractional real estate allows individuals with limited capital to build a diversified investment portfolio that includes property. Instead of being solely responsible for the financial outlays and management of a property, a group of people pool their money to purchase real estate collectively.
How it works
Fractional ownership structures vary depending on the type of property being purchased, the number of investors, and other factors. Some investments are facilitated by companies or online platforms specializing in fractional real estate. These platforms manage the entire process, from finding a property to offering shares to potential investors. It's an ideal option for those new to fractional ownership.
More experienced investors might form a limited liability company (LLC) to purchase properties. This requires a deeper understanding of real estate investing and fractional ownership but eliminates the need to pay extra fees to a company.
Regardless of the structure, fractional ownership opportunities in commercial real estate typically have lower investment minimums than traditional real estate investments. Owners receive a return on their investment through rental dividends or profits after selling a property.
5 Pros of Fractional Ownership in Commercial Real Estate
1. Affordability
Fractional ownership allows individual investors to purchase a percentage of a commercial property that might otherwise be out of reach. It opens doors for those lacking capital and enables groups to invest in more expensive and potentially more profitable commercial spaces.
2. Shared Costs
By investing in fractional ownership, maintenance, acquisition costs, closing costs, taxes, and other fees associated with purchasing a property can be evenly divided among all owners. This significantly reduces the burden on individual investors.
3. Flexibility
Fractional ownership provides a flexible framework for investors looking to utilize the commercial property they have invested in. Some options include receiving a deed and equity or purchasing property shares. Additionally, investors may have the option to use a portion of the property for their own needs.
4. Diversification
Fractional ownership allows investors to have shares in multiple industries, protecting them from potential losses if one property performs poorly.
5. Potential Appreciation
Fractional ownership offers the potential for property appreciation, providing investors with the opportunity to see their investments grow.
4 Cons of Fractional Ownership in Commercial Real Estate
1. Complexity in Management
Managing a property as a group can be more challenging than single ownership. Decisions and usage are moderated by predefined agreements, but unanimity can be difficult to achieve. However, the collective decision-making process often leads to better outcomes in the long run.
2. Less Liquidity
Selling a property through fractional ownership can be more challenging than selling it individually. Advertising, finding a buyer, and getting other owners to agree on the sale can present obstacles.
3. Potential Conflict
Sharing decisions and coordinating investment goals with others can lead to conflict. Clarity and well-defined contracts are essential to prevent misunderstandings and disputes.
4. Financing Challenges
Getting a loan for a fractional investment in commercial real estate can be challenging. Most opportunities in fractional ownership prefer cash transactions.
The Bottom Line: Is Fractional Ownership in Commercial Real Estate Right for You?
Ultimately, the decision to pursue fractional ownership in commercial real estate depends on evaluating the pros and cons and consulting with financial advisors. They can guide you through your rights, responsibilities, and potential for profit. Working with a realtor experienced in this type of investment can also provide valuable insights.
Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation's leading real estate education platform for home buyers, sellers, and investors.
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