Fractional Ownership Pros and Cons in Real Estate (2024)

The soaring price of real estate in recent years makes it a high-growth investment segment. But, at the same time, many people find it difficult. Owning a full-fledged luxury vacation home is so pricey that many investors cannot afford it alone. However, the emergence of fractional ownership plans makes it a bit easier.

Table of Contents

What is Fractional Ownership?

The concept of fractional ownership is growing popular these days because it does not come with a hefty price tag while you enjoy the benefits of property investment. It is a trending investment model that allows you to buy/own a high-value real-estate asset. While providing an affordable way to make property investments, fractional ownership offers dual benefits- first, capital appreciation and second, rental revenue.

Here’s an Example to Understand How it Works.

Suppose a high-value property worth around 30 crores is managed by a group of investors. Now, these investors are inviting retail investors to invest a small amount. This is an opportunity for retail investors to earn a fixed return as per their investment.

For Fractional Ownership, a list of properties is listed in the platform. Once the minimum ticket size is decided retail investors are invited to buy the share as per their capacity.

However, this solid asset investment comes with its own set of drawbacks as well. Here are the benefits and risks of fractional ownership in real estate.

Benefits of Fractional Investment in Real Estate

Fractional ownership gives the scope for investment diversification and building a robust portfolio. Here’s a look at the benefits.

1. The Entry Point is Lower:

Imagine buying an entire property at this market when market prices are soaring. From that perspective, investment for fractional ownership needs much lower capital. This way, retail investors can invest in luxurious retail segments that are otherwise not possible. Moreover, it offers high returns even from a rational investment. This is one of the prime benefits of fractional investment in real estate.

2. Investment Diversification:

Investment diversification is one of the best ways to build a stable profile. Having different properties across different locations diversifies your investment profile to a great extent. It helps mitigate risk exposure in the property market. In case, there’s a downturn in a single property, you can still be stable with your other property investment.

One of the biggest concerns in the property market is to carry out maintenance expenses. Whenever you are a fractional owner, your responsibilities are shared with your co-owners. It reduces individual financial burdens while you can still enjoy the property benefits. Also, you do not need to worry about day to day management of properties.

4. Potential for Profitable Returns:

Real estate investments always incur high returns. And, it’s no different when you are a fractional owner. The capital appreciation as a fractional investor can’t be undermined at any point, Secondly, there’s always a scope for rental income.

5. Own Premium Assets:

Fractional ownership gives you the scope to own luxurious and premium assets, which are otherwise unaffordable. As an investor, you can thus own plush vacation homes, yachts, commercial properties at prime locations, and other high-profile assets.

6. Liquidity:

As a fractional investor, you get more liquidity, compared to the traditional property investment. No wonder, selling your shares becomes much easier when needed.

Risks in Fractional Real Estate Investment

However, it’s already mentioned that fractional ownership also comes with its own set of disadvantages, and ignoring those would only lead you to trouble. Let’s find out what are its drawbacks.

1. Limited Control on Your Property:

While you have less financial burdens, Fractional ownership also means limited control of your property. You can’t be the sole decision-maker for anything related to the maintenance of the property. Whatever decisions are made, all co-owners must agree. This kind of arrangement creates disagreements and personality clashes most of the time. Also, your access to your share of property becomes limited according to the legal agreement. Some properties have access during specific times of the year.

2. Difficulties in Selling:

When there are several decision-makers, it’s quite obvious that you might face difficulty in selling your property. There are not many potential buyers for your shared property ( obviously, when there are many heads involved in the decision-making). You may need to accept a lower price for your part of the property. Sometimes, you also need a “go-ahead” from the co-owners before you sell your property.

4. Hidden Costs and Uncertainties:

Fractional ownership comes with several hidden expenses, which are not apparent. These expenses, in turn, affect your returns. Secondly, shared ownership does not help you build a broad portfolio. To top it all, there are legal and other regulatory issues leading to circ*mstantial uncertainties.

Is Fraction Real Estate a Good Investment

Well, it’s an emerging trend and in many instances has provided good returns to investors, However, the risks involved in it cannot be undermined. However, several considerations come into play before you make up your mind for a fraction investment. Here are some points.

Investment Objectives: Fractional Investment is clearly not for you if you believe in aggressive moves. It’s good for capital appreciation, passive income, and other similar things. Moreover, it offers slow growth.

Risk Tolerance: As already mentioned there are several uncertainties related to this investment plan. Moreover, the growth curve is pretty slow. All these factors make the investment a bit risky. Now, if your risk tolerance capability is not high, avoid this investment plan

Also Read: What is Fractional Investment in Real Estate in India?

Conclusion

Fractional Investment plan makes a great option if you are ready to deal with the uncertainties that come with it. It’s good for the ones with limited experience because too much financial burden will be difficult to deal with if you are new to the investment world. Ultimately, it’s your decision whether to invest in a fraction property or not. However, seek professional assistance if you are not comfortable to start with,

Also Read: How to Diversify Your Investment Portfolio in India