Insight from the Law office of Joseph Marino, PC

How Does It Work?

When you invest fractionally in real estate, you’re purchasing a “fractional share” of property from a company. Sometimes there are just a few investors, and other times there may be hundreds. Investors receive a portion of the cash flow from rent paid by the leesees. It is truly passive income, as you don’t have to deal with property management duties—those are the company’s responsibility. 

Commercial vs. Personal Property Investments

As a fractional investor, you can choose to invest in commercial or personal property. You are likely already familiar with the personal property model: in most cases, it’s a vacation property, and the investors receive either time or space occupancy. You own the property alongside other owners, and you all benefit from its appreciation. In other words, it’s a timeshare purchase. 

Commercial fractional investing, however, is quite different. You don’t receive any time occupancy; rather, you get the rights to a prorated amount of the property’s rent cash flow. 

Pros and Cons of Fractional Investments

Pros -

• Low entry barrier: it just costs a fraction of what you would pay to purchase a property outright. 
• Passive income: You won’t have to actively work to earn income on the property. The company takes care of all property management duties. 
• Availability in competitive markets: Real estate hotspots like Seattle and LA price many buyers out of the market. With fractional investment, you can now own parts of properties in even the most expensive areas of the country. 
• High returns: Historically, investors have gotten great returns from real estate holdings. Rent prices have been increasing steadily, which leads to larger payouts for fractional investors. 

Cons-

• Risk: Although real estate investments have high returns, on average, there is still inherent risk with every investment. There are factors out of your control: non-paying tenants, declining property value, a crashing market, etc. 
• Long Timeline: Typically, you can expect a required investment timeline of 5-10 years. 
• Fees: The companies that offer fractional shares will charge fees. Each company has its own rules, so it’s important to pay attention to the fine print. In addition to standard management fees, you may also have to pay a redemption fee if you withdraw from the investment early. It would be well worth it to receive legal consultation before making a fractional investment in property. 

Have More Questions About Real Estate?

The Law Office of Joseph Marino, PC is here to help guide you through complicated real estate dealings, whether you’re buying or selling. We provide sound advice in many specialized areas of residential and commercial real estate. Give us a call today to learn more about how our law office can tackle legal challenges you might be facing.