Stakeholder Safety in Fractional Ownership - How it Works
In financial planning, it is important to look for options, which provide financial security along with the benefit of favorable returns. When you consider investing in real estate, how does the risk fare?
Investment in anything comes with a pretty normal question preceding it - how safe is it? Even with the myriads of disclaimers at the end of TV jingles “investments are subject to market risks”, financial gurus still advocate that investment is better than parking your money in a savings account. When you speak of investing in stocks, bonds, precious metals, companies, and the like, there is already a ton of information available on how the risks are managed. Based on your appetite for risk, you can very well opt for an option that can provide you with a satisfactory return within manageable risk thresholds. As someone who has a stake in any investment, the safety of your investment comes first. That is why risks are always explicitly mentioned in any investment option. When you consider investing in real estate, how does the risk fare? Since it is an immovable asset, it is mostly insulated from market volatility. That, however, also makes the asset illiquid. Fractional ownership in commercial real estate addresses both these concerns. Let us understand how.
Fractional ownership simply allows more investors to pool in their bit in one large investment in an asset. They get their returns based on the percentage of contribution to the total investment amount. In terms of real estate, the same rule holds, and each investor becomes the owner of the asset proportionate to the investment that they made. Real estate by default is a rather risk-free asset, by nature of its immovability. Care should be taken that the assets are well-researched and in-depth financial modeling is done so that investors do not end up with a very costly paperweight.
Due diligence, research, and financial analysis apart, commercial real estate mostly works out better for investors than residential real estate. With the lease terms being stricter, the lease period longer, and the presence of a lock-in period, investors can mostly rest assured about the returns from an investment in CRE. However, residential real estate takes up much more time and involvement to ensure that the asset remains beneficial.
When investing in real estate in an individual capacity, there are many aspects to consider. The validity of the property, any problematic claims that could crop up, the rents in the market, and the overall historical performance of the asset. One can easily employ a real estate investment firm to take care of all this, but the firm also charges its own commission for the services offered, increasing the overhead in the investment scheme. Sure, you could choose to be part of a REIT and invest in CRE. However, while you discount the headache of managing the asset on your own, and cut down on the commission charged by management firms, you cannot choose how much of your investment is distributed among which asset in the REIT. Fractional ownership comes with this freedom of choice.
Generally, an SPV (Special Purpose Vehicle) is employed to handle the investments done in any asset. The management of the asset and the payout of the rental returns is done by the SPV. Since the investment amount is distributed, investors can easily decide how much they want to invest without taking undue risk. An SPV is a recognized legal entity and has been formed just to ensure the safety of the stakeholders and their investment in the concerned asset. Terms and conditions, due diligence, and all other legalities are completed through a set process and the investors are kept in the loop throughout.
Starting an investment in CRE via fractional ownership is not only easy but highly secure as well. The only thing required of the investor is the investment amount, and the willingness to stay invested in commercial real estate for the long term. Real estate is good when considering long-term investment; let no one tell you anything otherwise. To know more about how Strata handles your investment via fractional ownership, visit us at www.strataprop.com.