Exit Routes in CRE Investment via Fractional Ownership
When speaking of real estate, the concept of a well-planned exit route becomes all the more important since the investment is of an illiquid nature. In fractional ownership, things become way easier than with a traditional investment model.
An exit strategy involves the disposition of the asset so you get back your investment amount initially used. In terms of real estate, that normally happens through the sale of the asset. That holds good for residential as well as commercial real estate. While sale and leaseback is a conventional approach that is used in fractional ownership, there exist other ways in which exits can be planned in this investment model. The question that arises naturally is - if you are satisfied with the returns and stability of investment, why would you want to exit it?
Simply put, every investment will eventually hit a ceiling. In commercial real estate, buildings and spaces will face wear and tear or just become irrelevant or might need a complete overhaul. During that time, the cost of maintenance will mostly overtake the returns received. To avoid this, it is always good to plan an exit strategy ahead of time. Setting aside the issue of incurring losses on your investment, it is also wise to exit an investment if you find a better one available. Investment in commercial real estate is a great option for having a passive income, and there is no harm in deciding to get a better rate of return from a newer asset. So, exiting from an investment and reinvesting the capital in another asset is a perfectly logical thing to do.
Now that the need for having an exit strategy is fairly established, let us explore how exit strategies usually work in CRE investments. Traditionally, investments in commercial real estate amount to multiples of crores. It is also not unusual for people to be invested in real estate by using loans, owing to the large investment amount required in traditional models. An exit plan in this situation involves either selling the property or taking out a new loan at the maturity of the previous one. Most owners or investors would start the selling process 12 months in advance of the loan maturity. The second way of an exit is to maximize the occupancy rate and then switch to another asset. Investors here technically stay for a shorter duration than the full length of the lease period of a tenant. That helps them avoid a comparatively low IRR as time goes by. The third most popular exit strategy is to hold the investment till the capital expenditures (CAPEX) are about to occur. Again, this holds good for traditional investment models, where one is the sole owner of an asset.
Coming to fractional ownership, however, the mentioned exit routes do not hold well. To start off, fractional ownership does not involve a large overhead in acquiring a suitable investment asset. Thus, the urgency to take a loan is not present. Neither the worry about its maturity date. Interestingly, the company created to handle the fractional ownership of an asset has the responsibility of ensuring maximum occupancy. So, an investor does not have to bother about the tenancy rate either. Lastly, the CAPEX costs are dealt with by the managing firm, and the fees are distributed across many investors, so the burden does not bite into any individual’s investment in a significant manner. The simplest exit strategy in fractional ownership basically depends on the investor. If you want to explore other assets and want to move out of an investment, you can easily auction off your portion of the ownership via the investor marketplace/portal or can transfer ownership to anyone else interested in your circle. Since the investment amount is to the tune of a few lakhs, it takes only a couple of months to find an interested investor to take your portion of the ownership off your hands.
This is one of the major reasons why fractional ownership is such a great option for getting started in commercial real estate investment. Along with lessening the burden of investment, it helps in an easy exit strategy. To know more about how Strata’s model works in ensuring the best assets are available to you for investment, visit us at www.strataprop.com.