How does Fractional Ownership Help Diversify Your Portfolio

Historical evidence shows that recessions and corrections follow cyclical patterns, so even if we're not experiencing one right now, one is on the way. Similarly, if we're now in a recession, a recovery is on the way. Despite that being said, it is still very often that we are unable to predict what is the next macroeconomy scene to be followed in this turbulent time. Consequently, it is imperative that as a real estate investor to hedge our bets and prepare for the storms ahead and invest for long-term success.

Diversification is one of the most effective ways to optimize the long-term growth of one’s investment portfolio. You don't even have to go into other assets like stocks or cryptocurrencies to diversify your real estate portfolio. Your total risk and long-term profits may be reduced by investing in a wide range of real estate assets.

Property investing is one of a kind because of the wide range of assets available. Everything from residential, industrial, commercial, and self-storage space are all viable investment options. It's possible to add value and make money with every sort of asset. If you diversify your investments, you can protect yourself against macroeconomic shifts, such as the rise of e-commerce or the movement away from traditional office premises to virtual ones.

Here comes the real question, how does one diversify his/her real estate investment portfolio effectively, even with limited capital to employ? This is where fractional property ownership plays an important role in ensuring this to be materialized. In this article, we will walk you through on how fractional ownership works and why it is important to leverage this emerging trend to diversify your portfolio. 

How does Fractional Ownership Work?

You may have heard of fractional ownership of property in the form of real estate investment trusts (REITs), but nonetheless fractional ownership of properties powered by asset tokenization on a blockchain operates on a different level altogether. 

To put it in simple terms, real estate tokenization is one of the many use cases of asset tokenization. In essence, real estate tokenization refers to the process of converting the ownership of a particular real estate into numerous digital tokens that are listed on blockchain. With each digital token representing a fraction of the property’s ownership, the owner may choose to take a particular portion over a property instead of purchasing the entire stake of a property at the outset. 

To further distinguish real estate tokenization from REITs, an owner of a digital token will also be granted with the underlying ownership and value attached to the property. In other words, the owners get to enjoy both the decision making power and capital appreciation of real estate whereas REITs may only offer investors with the latter option.

How does Fractional Ownership of Property help Diversify your Portfolio?

Large sums of money must be committed to a single real estate purchase in order to make a profit. As a result, diversifying your real estate holdings might be quite difficult. Real estate tokenization allows investors to acquire a 10% stake in a property in 10 cities rather than owning 100% of a property in one city.

In order to reduce your overall investment risk, you may consider diversifying your holdings. Investors do not have to place all of their eggs in one real estate market; instead, they may spread their bets over many, each with its own set of risks and returns. It is through fractional property ownership, retail or smaller investors are no longer confined to residential properties. By lowering the entry barrier of investing in real estates, commercial properties such as hotels, warehouses or office buildings become viable options for retail investors, which are previously only available to larger or institutional investors. 

In doing so, you may avoid being too reliant on a single type of property by properly diversifying your investing portfolio. You can also do away with the hassle of obtaining bank facilities to secure any property purchase since the financial consideration needed for an investment has substantially reduced to the extent that it will not necessitate any loan in the first place. As a result, you do not have to worry about the risk of defaulting on any loan and also eliminate additional financial burden from your shoulders. In turn, you may utilize your life savings for other mediums. 

Conclusion

If there is any occurrence of market downturn or unfavoured market news, the real estate market might experience a severe recession, wiping out the savings of investors with poorly diversified portfolios.

With Fractional Ownership, retail or smaller investors may now invest in a broad range of properties such as commercial real estates which are previously unavailable to them. The minimum investment requirement has been greatly mitigated, allowing you to invest in a wide range of different assets, including both residential and commercial real estates.

All in all, tokenized real estate provides the opportunity for investors who have been unable to pay the high upfront capital requirements of property investing to participate in this asset class for the first time. One of the advantages of tokenization is that it allows larger or institutional investors to rebalance their portfolio in real time by selling or buying tokens to alter their exposure to a specific asset. This allows investors to more easily manage a broader variety of assets in their portfolio.

*Disclaimer: This article does not serve as investment advice in any form and manner. You are strongly advised to always seek professional guidance from experts before initiating any investment moves.