Fractional Investing: The Same or Different when compared to REITs?
While fractional real estate investing is just beginning to reach a broader audience of real estate professionals and investors alike, other long standing real estate investing vehicles such as REITs or Real Estate Investment Trusts, have been available to retail investors for some time.
REITs have consistently been a well performing asset class that will likely continue to do well in the long run. However, fractional investing has some key differences from REITs that help provide much greater return on investment for the individual owner.
Real Estate Investment Trusts
A real estate investment trust, or REIT, is a company that owns income-producing real estate across a range of markets and investment strategies. Investors then have the opportunity to buy shares of the REIT, which allows them to effectively share ownership of the real estate owned.
Between high, steady dividend income and long term appreciation that strong real estate investments provide, REITs have historically delivered steady and competitive returns. This method of investing is a very soft approach to real estate investing and the benefits reflect that.
Fractional Real Estate Investing Vs REITS
Fractional investing has many differences from traditional REITs. Keep reading below for comparisons between these two investment vehicles to understand the benefits and drawbacks of both and determine which strategy is better for you.
Cost of Entry
There will typically be a minimum amount to invest in fractional real estate. This minimum can range from $5,000 to $100,000 or more depending on the organizer and the property class being purchased.
There are two different types of REITs - publicly traded and private. Publicly traded REITs typically see lower costs of entry and are often considered the better choice. An investor can invest as long as they have enough capital to purchase at least one share (share prices differ). Private REITs can have costs of entry between $1,000 and $25,000 - some of these entry fees can be expected before investing capital is considered.
When you invest in fractional real estate, you have total control of the properties you decide to invest in. Most fractional real estate companies will invest across a variety of markets and property types so you can pick and choose where your money is going. There are also more options available with fractional investing rather than REITs where there are limits on the types of properties they can invest in.
REITs give you no control over your investment as the management team will compile all due diligence and decide which properties and markets to invest in.
Given the freedom of choice that comes with fractional real estate, you can control the diversification of your portfolio.
REITs are naturally diversified - but again, you won't have any say in the types of property you are invested in.
Fractional real estate provides you the ability to sell your stake in a property to another buyer freely. With this, you can capture appreciation on the property, and it is more liquid than traditional real estate investing.
Publicly traded REITs can be bought and sold at any time that the markets are open. However, private REITs can be more complicated to enter and exit.
Fractional real estate investing typically plays on the long term success of real estate (real estate historically gains YoY averaged out) so there is less volatility.
Since REITs are traded constantly and they tend to follow the trends of the stock market, there is more volatility in this investment.
Which is The Better Investment?
When you are looking to expand your portfolio with fractional real estate or through an REIT, there are many factors to consider. Both investment vehicles are suitable for investors and one may make more sense for some investors. We have broken down some of the fundamental differences between the two to help you decide which is for you.
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