A salaried income, an “own” house, and a locker full of gold ornaments – traditionally, these things were thought to be essential savings and investments for the future. Many of us like to play it safe by investing in the tangibles that we trust, where we try to secure our future, and looking for the best options possible to multiply our savings and wealth. There are various investment options for that— fixed deposits, gold, stocks, real estate investments, and even venture capital.  But a close look at all of them reveals that the lowest risk and the highest returns come from real estate investments, especially with regards to commercial properties.

Commercial property tends to present a higher earning potential than residential real estate. Dealing with commercial real estate requires crores of rupees, which is not possible for a person with a regular income. However, there’s now an option for a conservative investor with a salaried income to also put down their money in commercial real estate. This new investment method is known as fractional real estate investment.

What is a fractional investment?

Fractional shares allow investors to invest small amounts in expensive securities, which otherwise may be out of their reach. Fractional shares allow you to purchase stocks based on the dollar amount you want to invest, so you may end up with a fraction of a share, a whole share, or more than one Share. This feature enables investors to select from a broader set of investment opportunities and diversify their portfolios even with limited capital.

How Are Fractional Ownership Formed?

In fractional ownership, unrelated parties can share passive ownership of a high-value asset, thus democratising ownership. According to Investopedia, “A fractional share is a portion of an equity stock that is less than one full share.” Fractional shares are formed in one of the following ways:

Dividend reinvestment plans

A dividend reinvestment plan is a plan offered by a company to shareholders that allows them to automatically reinvest their cash dividends in additional shares of the company on the dividend payment date. Dividend reinvestment plans are typically commission-free and offer a discount to the current share price.

Mergers and Acquisitions

When companies are merged or acquired, fractional shares are created. As companies combine new common stock using a predetermined ratio. Capital gains, dollar-cost averaging, and dividend reinvestment plans often leave the investor with fractional shares

Stock Splits

A stock split is when the price of stock reduces and the number of outstanding existing shares​​ increases proportionately. Fractional shares could be formed due to a split of stocks. Companies often do this to make the price more accessible to a wider range of investors.

Brokerage firms/platforms

At times when the costs of shares are very high, brokerage firms and platforms will intentionally divide the shares into fractions. The split shares will now be affordable for everyone, which will result in higher investment.

Traditionally, companies would offer shares and stocks that will make a shareholder a part owner of the company. The same logic now applies to owning a commercial property. With fractional investment in real estate, you can decide how much you want to invest and on what kind of property you want to invest in. Also, there are fractional investment platforms where you have the option to choose the kind of property and the percentage you want to invest.

Difference between Commercial and Residential Investment

A common factor in both commercial and residential properties is the location. For both property types, the access, facilities, safety, and amenities should be good. In the table below, we’ve listed the basic differences between commercial and residential investments.

 

Commercial Real Estate Investment

Residential Real Estate Investment

The down payment for the property is 25% to 35% of the property valueThe down payment for the property is 10% to 20% of the property value
The return on investment is generally between 6 and 12%The return on investment, on average, is between 2%-5%.
In most cases, maintenance is managed by the leasesIn most cases, the owner needs to take care of the maintenance
Lease period can be 3 to 5 yearsLease period is 11 months
Managing any dispute depends on the lease agreement and falls under the contract lawLegally, the law favours the tenant, so disputes can be difficult to manage
3 to 5% annually. Every category of real estate appreciates around the Inflationary index in the economy .The appreciation rate for residential has been around 3% to 5%

 

Where to buy fractional real estate shares?

Fractional ownership investments in commercial real estate are done through a Specific Purpose Vehicle (SPV) in which funds are raised to own and manage the property.There are two ways in which you can buy fractional real estate shares. One, you can directly purchase fractional shares from the property holder who is interested in inviting investors for the commercial project. Second, you can buy fractional real estate shares from brokerage firms and online brokerage platforms.

Here are the difference between the two-

Directly from Owners

Through Online platforms

 You can get the actual sale deeds and title of the property while buying directly from ownersOnline investment firms usually offer shares of the SPV holding the property.

 

Can be both divided and undivided shareUndivided share
Stamp duty is applicable (6.6%)Stamp duty is not applicable if the shares are in demat format.
Loan against property is a secured loan availed against a property as collateral.Depending on the intention of the parties & the circumstances of each case shares may/maynot be pledged or mortgaged
Investors can individually exit by liquidating their portion of the property. Changes in bylaws are not required.While both the board and shareholders can propose amendments to the bylaws, only the board can propose amendments to the certificate of incorporation.

How to buy fractional real estate ? 

In the case of online platforms, you need to first get in touch with reliable companies offering registration on the brokerage site by providing the required KYC and other documents. After you register, you can browse the properties listed online on the platform. You will receive the dividends in the form of a percentage of rent or lease of the property. When you want to sell the fractional real estate shares for a property, you can do it on the platform itself.

In case of directly buying from the owner, we can personally identify and meet the property owners and evaluate the property. A principal custodian of the property is then decided upon who would represent all the co-owners, maybe in the form of an association. Each co-owner is issued fractional ownership certificates once the sale deed is registered and benefits from the property are split between individual shareholders in form of income sharing, reduced rates, and usage rights.

Conclusion

If you’ve always been interested in real estate investment, but have stayed away from it because of the huge amounts required for investment, fractional investment is a great option. Commercial properties in top-tier cities definitely make a great investment. And fractional real estate shares are a great way to earn a second income or passive income.

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