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Advice On Fractional Ownership For Real Estate Investors


Co-founder at Upperkey. Passionate about property, tech and driving international business growth.

The real estate industry has been historically characterized by a large number of intermediaries, material information asymmetry and high barriers to entry. This less-than-ideal configuration, which has essentially been unchanged for decades, creates frictions and frustrations for buyers, sellers and renters.

Given the economic importance and the gigantic size of the real estate sector, it is no surprise that a multitude of start-ups have been working tirelessly to transform the various verticals of the real estate value chain.

Actively working in real estate for over a decade now, I have seen how ever-growing sources of data combined with machine learning capability have underpinned the promise of iBuyers and iRenters to streamline the time-consuming and painful processes of buying or renting a property. Both models remove frictions by essentially allowing participants to exchange money for convenience.

Reflecting on the recent string of news about major institutional investors placing billions of dollars in residential property markets in the U.S. and abroad, I have searched for the equivalent of iBuyers and iRenters that would allow me to invest in residential real estate in a frictionless and quasi-instant way. I hope to answer questions like: Why is fractional ownership relevant to real estate investors, and what criteria should investors look at when they compare platforms? 

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Limitations Of REITs

Real estate investment trusts (REIT) have been around for decades and offer liquid exposure to real estate. However, they appear inadequate to meet my particular objective for several reasons. To start with, the choice of traded-REITs providing exposure to residential real estate is very limited; the U.S. market has only a few of them, and once you want exposure to other well-established real estate markets like in Europe, the offering is even thinner if not completely absent.

Besides, the liquidity provided by REITs comes with a trade-off: prices of REITs are very sensitive to interest rate fluctuation and overall market sentiment. In my view, this negates one of the most significant appeals of real estate: I would no longer benefit from the low correlation and diversification provided by this category of assets.

Finally, when I invest in real estate, I look for return potential from both rental income and capital appreciation. While REITs put a clear emphasis on regular distribution, the transparent access to the capital appreciation I would gain from a REIT investment seems more questionable.

Methods Into Fractional Ownership

As an alternative, investment in fractional ownership of residential real estate can be an innovative and attractive way to access the same investment benefits as direct property ownership without the associated frictions.

While the principle of fractional ownership seems rather simple — you own an interest in a property alongside other unrelated investors — its actual implementation can take many different shapes and forms. After comparing several alternative real estate investment platforms, such as Cadre, ENTR and Pacaso, to name only a few, I can share some observations on this fast-growing space.

First, the profile and quality of the investable real estate hugely varies from one platform to another. For wealth accumulation and preservation, I am a firm believer in the old mantra “location, location, location” and thus personally prefer to invest in prime properties in city centers over suburban or rural single-family homes.

Second, there is a wide spectrum of fractional investment models. At one end, there is the marketplace that only offers listings of tokenized properties, i.e., the modern equivalent of a real estate agent. At the other end, you’ll find full-service investment platforms that have experienced teams curating quality assets and co-investing in the properties alongside investors to ensure the alignment of interest.

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Finally, the real estate investment experience of the team behind each platform is a critical aspect for assessing their ability to provide attractive opportunities. Based on my experience in this industry, only on-the-ground networks and relationships can provide access to the best deals on the market.

Conclusions

In my opinion, asset profile, alignment of interest and the real estate experience are key criteria to keep in mind when evaluating the different investment platforms and sorting the wheat from the chaff.

This is an exciting time for investors who can explore new and innovative ways to invest in real estate. I have no doubt that the accelerating use of technology such as blockchain will contribute to turbo-charge the adoption of these investment alternatives. I am looking forward to buying a share of a building the same way I am investing in the stock market with my phone.


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