How to Invest in Property Shares: A Beginner’s Guide

The first picture that comes into mind when you think about real estate investment is the buyout of an entire property: a home, an apartment building, or even a commercial property. What if you could invest in real estate without taking on the full financial burden of owning an entire property? That's where property shares come in. 

In essence, to invest in property shares allows you to purchase part shares of property, making real estate investment more accessible. This type of investing, known as fractional real estate investing, is gaining popularity as a way to a diversified portfolio without the hefty price tag of traditional property ownership. In this guide, we'll explore how to invest in property shares and break down how fractional real estate investing works, offering a simpler way to enter the real estate market. 

What are property shares in real estate?

Property shares, better known as fractional real estate investing, allows investors to be partial owners of property rather than being the outright owner of the asset. It allows various investors to pool resources that may be used in purchasing real estate together. Every investor this way owns a certain percentage or share of the property and will thus have direct entitlement to a portion of the returns, either through rental or an appreciation in value.

Fractional ownership

Fractional ownership splits the cost of the property and its benefits among a number of investors. Common legal structures for fractional ownership include LLCs (Limited Liability Companies), LLPs (Limited Liability Partnerships), and TICs (Tenancy in Common). 

1. Fractional ownership through entity: Money is pooled together from investors for a real estate purchase through an entity-LLC or LLP. This gives the owners limited liability and allows investors to hold shares in the entity rather than taking direct deed to the property.

2. TIC, or Tenancy in Common: Direct ownership of a percentage of the property by each real estate investor, with the owner maintaining a deed to his percentage. Unlike entity ownership, TIC ownership is often more complex, including potentially more direct responsibilities concerning property management.

Direct vs. indirect fractional investing

Direct fractional investment means the investors are actual owners of particular property either as co-owners or through some form of legal entity, an LLC, for instance. This affords the investor with direct ownership and, quite often, usage rights to the property.

Indirect fractional investing refers to when shares are sold to investors after a platform or firm has bought the real estate. In this case, investors do not own a deeded portion of the property but rather shares in a company that owns the property.

Benefits of property shares

Fractional ownership allows for lower upfront costs, shared maintenance and upkeep expenses, and potential passive income. It also provides deeded ownership, unlike timeshares, which only grant usage rights.

1. Lower capital requirement - Investment in property shares has a lower cost of entry compared to traditional ownership of real estate. In place of saving for years for a down payment and taking on mortgage debt, you could commence investment with some limited capital.

2. Real estate portfolio diversification - To invest in property shares allow investors to diversify their portfolios by spreading their investment across multiple properties or different types of real estate. 

3. Professional management and transparency - When you invest in property shares, property management firms take up the day-to-day running, such as tenant relations, maintenance, and adherence to law, among others.

Key differences from other real estate investments

Understanding how fractional real estate ownership compares to other types of property investments is key to making informed decisions. Here, we’ll explore how it differs from both timeshares and Real Estate Investment Trusts (REITs).

Versus timeshares

Fractional ownership entails deeded ownership of a portion of the real estate, which then can be utilized to gain rental income or appreciate in value. Timeshares, on the other hand, are often sold without even ownership rights but with usage rights for a week or two every year. Fractionally, you own literally a share of the property and hence have more access to financial benefits and flexibility.

Timeshares are usually high upfront and cost a great deal to maintain, with minimal resale value. Fractional ownership, on the other hand, is more of an investment in a tangible asset that can appreciate in value, making it a potentially more rewarding option.

Versus REITs (Real Estate Investment Trusts)

REITs allow individuals to invest in real estate through publicly traded companies that either own or finance properties yielding income. REITs have low involvement and high liquidity, but they do not provide direct physical property ownership to the owner.

Fractional ownership provides you with a deed to a certain property, therefore reaping the possible benefits of property appreciation and rental income. While REITs are generally passive and diversified, fractional ownership is the much more active and direct way of investing in real estate.

Investment options

Today many real estate investment platforms give the ability to invest fractionally in real estate. Companies like Concreit, Arrived, Ember, and Fintor will make the access to investing fractionally in real estate very easy. These are differently structured platforms: some offer fractional ownership in specific properties directly, but others indirectly, through investment pools.

They also offer a more traditional route to invest in real estate through publicly traded companies for those who may want it. While REITs offer such liquidity and professional management, they themselves do not provide any direct ownership in properties to the individual investor.

Considerations

Consider your interest in the potential for direct ownership and the associated tax benefits, or your desire to be more passive with REITs. Partial ownership offers, to an extent, more direct involvement, while REITs would be ideal for investors who look for liquidity with limited responsibility for direct management.

Fractional ownership is sometimes less expensive initially than full property ownership, but it merely replaces the ongoing management and maintenance expenses. REITs, on the other hand, open an investment opportunity with smaller amounts and do not include a direct ownership aspect over properties.

How to invest in direct fractional real estate (crowdfunding)

Most direct fractional real estate investing involves crowdfunding platforms rounding up money from several investors to purchase properties. Here's how you get started:

1. Choose a platform: Research and identify a good crowdfunding platform that would provide an opportunity for investing in fractional ownership of a real estate. Some platforms are more focused on residential, while other websites may offer commercial real estate opportunities.
2. Review property listings: Once you have signed up on a platform, browse listed investment property opportunities. You are typically provided with comprehensive information regarding the targeted properties: where they are located, the estimated returns, and how ownership is structured.
3. Invest: Having selected a property, you decide how much you want to invest. Most of these platforms offer investment starting from just a few hundred dollars. In other words, you would purchase fractional shares in that property, while its management and operation are the task of that particular platform.
4. Earn returns: You might receive potential returns as rental income or via the appreciation of the property in question. Many portals make regular payouts depending on the performance of the property.

Conclusion: Is property share investment right for you?

To invest in property shares can be a very good avenue to extend your portfolio's exposure to real estate while enjoying the fruits of property ownership without the full financial burden. Fractional real estate investing allows an investor to start with less money and access a professional management team while still benefiting from the growth in the real estate market. Interested in a more direct way to invest in real estate and reach your financial goals, but not to acquire an entire property? Property shares might be the right fit for you. 

FAQs

How does fractional real estate investing compare to traditional property ownership?

Fractional investing in real estate makes it possible to own a portion of a property with lower capital , unlike traditional ownership, where one has responsibilities for the whole property. Investment spreads the cost, responsibilities, and possible returns across many investors.

Are there any risks associated with fractional real estate investing?

Yes, like with any investment, there is risk involved in fractional real estate. The eventual value of the property might appreciate or depreciate, and no rent can be ensured. You may also have less control of the property compared to fully owning it.

How do management firms handle fractional real estate properties?

Professional management companies handle the daily operations, from tenant relations and maintenance to ensuring legal compliance. The firms offer transparency to the shareholders through regular updates on the financial performance and state of the properties.