Introduction

Fractional investing is an investment strategy where an investor, let’s say you, purchases a share of an asset thereby taking fractional ownership of the asset along with any potential income generated from it. 

Now, your Google search obviously indicated that you want to know in-depth about it, and in-depth we will in this article. 

Let’s start with a user journey: 

Say you woke up one day and decided that enough was enough! After all, how long would you just keep yourself limited to investing in FDs, Corporate bonds, or even mutual funds for that matter? It’s time to play big, right?

Playing in the big leagues, in investment terms, generally refers to high-value assets such as commercial real estate, stock market, and private equities. These are highly rewarding options. Investing in the stock market after careful analysis and market research can generate returns beyond limits.

As for real estate, there’s mostly always an upward trajectory with capital appreciation and rental income. 

Since they’re high-value assets, there’s also a higher entry barrier for the capital required for investment. While, the average minimum capital required to invest in residential property ranges anywhere between Rs. 50-70 lakh, investing in commercial real estate is typically beyond the reach of a retail investor, generally valued at 25-30 crores. (Source: The Financial Express)

So, is there no way we can invest in these high-value assets and diversify our portfolio to take a shot at higher returns? 

And that’s where fractional investment aka fractional ownership comes into play.

In the ever-evolving investment domain, fractionalization has emerged as a game changer, especially in real estate. This new investment approach opens up access to markets previously only available to the wealthy, opening the way to a wider audience.

Read on to understand everything about fractional investment before you consider and approach this revolutionary investment strategy with confidence. 

What Exactly is Fractional Investing?

Fractional investing enables investors to buy a portion, or “fraction,” of a high-value asset, such as commercial real estate or an apartment, to reduce the need for capital expenses. 

Let’s take one more analogy, shall we? 

Imagine you and a group of friends spot a beautiful artwork valued substantially more than any of you could afford individually. However, by pooling your resources, each of you can own a part of this artwork. This is the essence of fractional investing: collective ownership that allows for shared benefits and risks.

How does Fractional Ownership in Real Estate work? 

Fractionally investing in real estate involves purchasing a share of a property’s equity. This share grants rights proportional (pro-rata) to your investment size, including potential income from rent and appreciation in property value. 

It’s facilitated by platforms that divide property rights into smaller, purchasable units aka tokens, making real estate investment accessible without buying an entire property outright. 

The platforms allow you to choose an investment property from a curated list. Once you decide on a property, you invest a fraction of the property’s value. As the property generates income through rent or increases in value, so does your share value.

Now, let’s go through the key terms and jargon to understand the nitty-gritty of it, and develop a broader point of view: 

Fractional Ownership Glossary:

Let’s take a simplified case study to understand all the terms you need to know: 

The Scenario:

A group of investors aims to buy Pine Tree Plaza, a $10 million commercial space with shops and offices. The high price makes it tough for one person to buy, so they opt for a shared approach to make it easier for everyone to invest.

Sharing Ownership

Each investor buys a piece of the plaza. If someone puts in $1 million, they own 10% of it. This share, or equity, grows if the plaza’s value goes up or it earns more rent, giving them a slice of the profits.

Making It Easier to Sell

Suppose, one of the investors wants to exit the investment and convert their share into cash. The ease with which they can sell their share and turn it into cash reflects the liquidity of their investment. In traditional real estate transactions, liquidity is low, but tokenization drastically improves it.

Simplifying with Digital Tokens

Verified platforms such as PropFTX create digital tokens that represent small shares of the plaza, making it possible to invest with even less money. These tokens can be traded online like stocks, making it easier to invest or pull out money anytime.

So, here we have: 

Equity: It’s the value of an investor’s stake in an asset. Simply put, it entitles the investors to a fraction of the property’s value. Let’s say you have a 10% equity in an asset that is worth INR 50 lakhs at present, you’d get a return of INR 5 lakhs should you plan to sell it. 

Liquidity: It generally refers to how easily you can buy or sell an asset in the secondary market, it’s the degree of ease. Liquidity is a significant factor in all types of investments. 

Tokenization: In this context, it refers to converting an asset’s rights into digital tokens on a blockchain. (Learn more about how real estate tokenization works here.)

How is it Different from REITs and Direct Ownership?

Feature	Fractional Investment	REIT	Direct Ownership
Ownership	Partial in specific properties	Shares in a company owning multiple properties	Full ownership of a single property
Investment Size	Relatively small, flexible	Variable, subject to market value of shares	Significant, involves entire property value
Control and Decision Making	Limited, managed by platform	None, managed by REIT managers	Complete control
Income and Returns	Dependent on property performance	Dividends from profits of the REIT portfolio	Rental income and property value appreciation

Fractional Investing Benefits

Pros:

Better Accessibility: A lower entry barrier due to shared ownership makes it a more accessible investment option to people from diverse financial backgrounds. 

Portfolio Diversification: Again, with a low ticket size, you can invest in multiple properties and multiple types of properties, thereby diversifying your portfolio. 

Professional Management: Properties are often managed by experienced professionals, reducing the burden on individual investors.

Transaction Efficiency:  A blockchain-based system does not require any paperwork or waiting time for transactions to be processed. The result is immediate action and fast transactions. And, as stated above, there are no middlemen and no multi-layered communication to slow down the process.

That being said, real estate investments are no child’s play and you need to be careful about a few significant factors. 

Things to Consider Before Investing

Research: Understand the platform’s credibility, scan the properties on offer, and thoroughly go through the terms of investment.

Risk Tolerance: Better assess the risks involved, the movement of the market, and loss potential. See if the investment is aligned with your other life decisions and what scope it holds in the longer term. 

Legal and Tax Implications: It’s a no-brainer! Know the legality of your investments and how they are taxed. Real estate transactions can have complex tax implications.

Wrapping Up

Whether you’re an experienced investor looking to diversify your portfolio or a newcomer willing to explore real estate investments, fractional investing offers a viable path for both

We hope we have helped you better understand this alternate investment mode, and clear all your doubts about it. 

If you want to get more investment tips and be well-informed about the latest updates and experiences, head over to PropFTX, and sign up for our newsletter. 

And while you’re at it, you can also check some of the properties along with the minimum investment required, on our platform. 

Let’s start transforming aspirations into tangible assets, shall we? Cheers!