Fractional Ownership: The Smart Way to Own Real Estate in Modern Times

The ability to generate income and build wealth is a key benefit of owning properties. In the last several years, the paradigm of investing in properties has undergone significant changes due to the advent of emerging technology trends. 

Retail investors were precluded from investing in commercial real estate until recently because of the exorbitant costs. Residential real estate was the primary focus of their investment ventures. However, with the advent of fractional ownership, investors will have easier access to commercial real estate.

Investing in fractional ownership of both commercial and residential real estate may be a novel and intriguing alternative to direct property ownership without the difficulties posed by conventional methods, such as paying a high amount of down payment or securing facilities from the banks.

What is Fractional Ownership All About?

It's precisely what it sounds like: fractional ownership. Tokenization of the real estate will take place where the ownership of a piece of property will be converted into multiple digital tokens on the blockchain, in which each of the tokens represents a certain portion of the ownership.

As such, investors are provided with the option to purchase whatever amount of the tokens that they choose to have. This is contrary to the traditional method of investing in real estate where an outright purchase of any particular property is required. In other words, investors with lower capital are no longer confined to residential real estates but also expand their investment portfolio to include commercial real estates.

Differences between REIT and Fractional Ownership of Properties

You might be thinking that the concept of owning fractions of property sounds familiar to you, and perhaps the existence of real estate investment trusts (REITs) ring a bell in you?

With ideas like REITs and fractional ownership, retail investors may now invest in commercial real estate and reap the financial rewards of monthly rental revenue contributed by the tenants in these real estates. Nonetheless, if REITs are good enough to cater all the needs of investors, then why do we still have the idea of fractional ownership by tokenization? Here we explain to you what are the exact differences between REIT and fractional ownership and why investors may prefer the latter option.

i)            REIT:

Like mutual funds, REITs invest in properties wherein they pool money and invest it in successful real estate on your behalf. Such properties are leased out to businesses, and the part-owner receives a portion of the profits from this arrangement. However, with REITs, you are unable to pick and choose the properties you want to invest in. 

ii)          Fractionalized Ownership

On the other hand, fractional ownership is mainly powered by fractional ownership platforms which offer the properties that investors choose and pick which properties to have a stake in instead of the fund manager in REITs making the decision for you. Finally, you have the option to choose the amount of tokens you want depending on your investment goals and affordability. As an exemplary illustration of fractional ownership, consider purchasing two of the ten tokens offered by a tokenized property. You will now own 20% of the property and will be entitled to a portion of the capital gain and rental return.

Why do Some Investors Prefer Fractional Ownership over REITs?

Despite REITs having a long history and have always been one of the top considerations among many investors, it nonetheless comes with their own drawbacks too. To begin with, REIT investors do not enjoy autonomy when it comes to picking what and how to invest. REIT portfolios are mainly managed by the real estate market and real estate sector by the fund manager where investors don't get the chance to be involved in the process of building or diversifying their portfolios.

In addition, investors may be looking for a return on investment that includes both a rental income and a rise in the value of the property. Even though REITs place a strong emphasis on regular distributions on its dividend, nevertheless the investors are not the direct beneficiary of the capital gain from those properties.

This is where investors started to look for alternative property investment mechanisms such as fractional ownership. Here are some of the advantages that fractional ownership offer:

Enjoy the Best of Both World: Dividend Yield and Capital Appreciation

Younger investors may afford to take risks with their assets, but retirees should exercise caution. Fractional commercial real estate investments may provide both capital appreciation and rental income. Thus, it generates a steady stream of cash flow that may be paid out on a regular routine. This is owing to the fact that the format does not invest in under-construction buildings, ensuring high occupancy rates, stable rentals, and a steady income flow. There are no market swings with this asset class, unlike stocks and mutual funds. This is precisely what a retirement portfolio needs: a steady asset class with limited risk and varying returns.

Building the Portfolio of your Choice

With the fractional investment option, investors can choose how to diversify their portfolios. Choose which properties and types of investments to make on their own.

Potential investors perform their own due diligence and choose to have the option of choosing which properties to invest in, be it in the sector of residential or commercial which is contrary to REITs that mostly emphasize commercial real estate.

Hedge Against the Share Market

Market volatility is inescapable, and the majority of conventional assets are vulnerable to market shocks. Protect yourself by hedging against market shocks. Companies have been hit hard by the continuing pandemic lockdown, which has resulted in rising stock market volatility and long periods of very low-interest rates for conventional assets. In addition to enhancing returns via sufficient diversification, fractional investing may reduce portfolio risks, reducing the potential negative effect of market shocks.

Do You Want to Know More?

Finnax is at the forefront when it comes to property platforms in the region. Finnax aims to provide better long-term, risk-adjusted returns for our investors while also helping real estate owners in unlocking more channels of garnering liquidity through the way of fractionalized property ownership.

Visit Finnax to learn more about the industry!

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