Fractional Ownership in CRE
Is investing in commercial real estate as feasible for a retail investor as it is for institutions? Fractional ownership helps achieve exactly that.
We often hear that it takes money to make money. Going by that, if you would want great returns, you would also need to invest heavily. Fixed assets like real estate can offer great returns, but not everyone can afford to invest in crores on an asset. What if there is a way to invest in real estate through piecemeals and still enjoy the benefits of a stable and secure investment?
Commercial Real Estate (CRE) is a great option when considering long-term and stable investment. Coupled with a smart investment strategy, CREs can prove to be a consistent source of wealth creation. Over the past years, since 2013-14, the returns from CRE has been staying at 10-11% annually. But the crux of investing in CRE lies in the large ticket size involved in the investment in commercial real estate. Fractional ownership helps investors own a portion of a physical asset and allows for more freedom in terms of investment choices.
Understanding Fractional Ownership
Amit and Anshul are friends. Both have a keen interest in investment. While Amit looks for ease in investment, Anshul looks at better exit options in case an investment goes sour. With real estate picking up pace in India during the COVID times, both decide to try out investing in real estate.
Amit looks at owning an apartment complex in the suburbs. He has some amount of money, but to own the entire complex, he needs a loan as well. His credit history and financial standing allow him to get an easy loan and he starts his investment of INR 3 crores in a single residential real estate.
Anshul considers the same but is conflicted about the exit options. What if the location loses its value? Would it be easy to get his investment back? In the same location, however, there is a Grade A commercial space available and the investment firm is looking for multiple investors to gain ownership of the space. Through a portion of his available cash, Anshul opts for investing in CRE. Here, he also finds out about other commercial assets offered by the same firm. Anshul diversifies his investment across multiple properties for a total investment value of INR 2 crores.
The above example pretty much explains the difference that fractional ownership brings to the table. Property is first listed to be open for investment. The investment firm decides the minimum ticket size for investment. Any investment made in the property can be in multiples of the same ticket size. You legally own a percentage of the property based on your investment. The percentage of ownership decides your returns - which are a mix of monthly rentals and the interest earned on the security deposit.
From this, you can clearly understand that Anshul made a better choice in investing. Since his investment is diversified, his wealth can grow at better rates when compared to Amit’s investment. Both invested in real estate, but Anshul stands a better chance of making more stable returns since his investment depends on businesses, rather than individuals.
Fractional ownership breaks up an individual asset into portions and allows you to become the owner of a portion or more – based on the investment you make. You decide which asset you want to invest in and consequently, can form your own investment strategy suited to your risk appetite. If you consider that the fruitfulness of one asset has depreciated or find another lucrative CRE investment coming your way, you can sell your portions to another and not affect your investments across other assets.
The main advantage offered by fractional ownership is the flexibility to jump ship between investments. While CRE investment is for the long term, there can be a lot of factors that affect how your returns fare over the years. Fractional ownership allows you to switch between assets in a much better way. The other most overlooked advantage is that fractional ownership allows people to enter CRE investment at a comparatively lesser investment bracket. If you look at Anshul’s example, he never had any overheads to worry about and made better investments at lower ticket sizes. Likewise, if Anshul ever decides to sell his ownership in any asset, all he has to do is inform the investment form to set up an internal auction of his shares. His exit options are fast and easy, compared to Amit who must either lease out the building to different people or wait for a buyer who is ready to pay for the entire complex.
Why CRE and Why Fractional Ownership
CRE as an investment option is way more insulated than stocks, mutual funds, or precious metals. If aiming for a long holding period and stable returns, CRE investment is a wise choice to make. Fractional ownership allows you to invest in commercial real estate in a safe and secure manner and reduces the initial burden of a high investment ticket size. If you wish to know more about fractional ownership and how it can benefit your investment portfolio, please visit us at www.strataprop.com