Fractional real estate investing is essentially purchasing a portion of an investment property. A group of like-minded investors pool their money together, allowing them to invest in higher value properties than they otherwise would have access to. Read on to learn more about how fractional real estate works, and how to get started.
I wish I had learned about fractional investing much earlier in life, but somewhere around third grade they did start teaching me fractions. I remember those days clearly. Like most school subjects, it was repetitious.
If Johnny has nine friends at his birthday party, what fraction of the cake will each child get?
Sally and her four friends equally divide a pie. What fraction will each one receive?
I can’t speak to your school experience, but I’m pretty sure my elementary teacher had one heck of a sweet tooth! Nevertheless, I’m incredibly grateful to have learned such an important topic. In fact, my financial fortunes markedly improved when I discovered the power of fractional investing.
Before we get there, let’s take a trip down memory lane so you can learn from my evolution as a real estate investor.
Active Investing – The ‘Do It Yourself’ Approach
When it comes to investing in real estate, far too many people start as I did – investing actively in residential real estate (single family homes, duplexes, triplexes, and quads). Active investing means that you’re actively engaged in the operations of the property.
At a minimum you’re an asset manager overseeing the property manager, creating the budget, determining the capital improvement plans, and making the buy-sell decisions.
Oftentimes, active investors also take on the burdens of day-to-day operations. Becoming a property manager is serious business. It means dealing with tenants, toilets, and 2 a.m. phone calls. Depending on the number of properties you have, it can be a full time job and you’re always on call.
Active management of residential real estate can be lucrative for those with the requisite experience and expertise to turn a profit. Alternatively, those who don’t possess those capabilities are setting themselves up for failure.
When I chose this go it alone path, I started with two fourplexes adjacent to one another. I was just starting out and boy what a learning experience that was! Looking back, I’d seriously caution you against this trial and error approach.
Fractional Investing in Stocks
As my experience and expertise grew, I began to make money in residential real estate, but every mistake was costly. At times it felt like I would take two steps forward and then one step back. If I could do it all over again, I would have figured out how to invest passively as a fractional investor from the beginning. After all, stock market investors do it, why can’t brick-and-mortar real estate investors do it too?
How does that work in the paper asset world? A stock or share is a paper security that represents a fractional investment / ownership in a company. In essence, stocks are a way that like-minded investors can own a fractional share or percentage of a company.
For example, Coca Cola’s biggest investor is Berkshire Hathaway (Warren Buffett’s company). Years ago, he purchased 400 million shares worth about 1/11th of the company or 9.1%. That makes Warren Buffett a fractional investor. You may not be Warren Buffett, but even a single share of Coca Cola would give you a small fractional share of the company and a claim to a portion of its assets and earnings.
Fractional share investing is when like-minded investors pool their money together to purchase an ownership stake in companies or assets. Ultimately, whether it’s stocks, mutual funds, or REITs, these paper assets are all a form of fractional share investing.
Fractional Investing in Commercial Real Estate – Syndication
I got my first taste of passive fractional share investing back in 2004. At the time, I was living in New Mexico and a fellow ER doctor approached me to gauge my interest in investing with a handful of others. The project was a 72-unit property one block from the University of New Mexico in Albuquerque.
With more than 25,000 students in close proximity, it was a prime location and apartment demand was high. As a result, the profits were significant and the experience was eye opening.
There were no tenants or toilets that I had to manage. Instead, I pooled my money with like-minded investors to buy the property and leveraged the experience and expertise of professionals to manage it for us.
This type of fractional investing is called syndication. It’s a pairing of a Sponsor (real estate professionals who know how to acquire and operate high quality profitable properties) and a group of investors that bring the capital to acquire those properties.
Real estate syndication allowed me to invest in prime properties and prime locations that were out of my reach alone. A door had opened and suddenly multimillion-dollar properties with their multimillion-dollar down payments were no longer out of my grasp. That’s the power of fractions and fractional real estate investing. It has made commercial multifamily real estate accessible to all accredited investors and not just the ultra wealthy.
That’s my story of how I got started in commercial multifamily real estate. In retrospect, those early experiences taught me to love the industry. I learned the ins and outs of the business and made it my mission to help others gain access to these stable, tax-advantaged assets.
But, enough of my story…let’s talk about you.
Is Fractional Ownership a Good Investment for You?
First and foremost, there is no one size fits all investment portfolio. As much as I believe in fractional property investment, that doesn’t mean it’s right for everyone.
That’s why one of our core missions is to provide high quality information and education for potential investors. Ultimately, whether you invest with us or not, we want you to leave our website more informed about apartment investing.
With that in mind, I’d highly recommend you start with these two free resources.
Ultimately, if you believe in the power of fractional real estate investing and want to explore the possibilities further, then you should know that we have a brief, no-obligation qualifying process. The article linked below describes that process.
Our investors tell us that they invest in apartments for tax-advantaged, passive income and equity growth. They like the stable nature of this asset class and the diversification (diversification is about fractions too) benefit of hard assets that are uncorrelated to the stock market in their portfolio. Without a doubt, there’s a lot to like about commercial multifamily real estate and fractional investing.