Understanding fractional property investments

Posted on: 30th March 2022 in Mortgage & Property

When it comes to the property market, the barrier of entry for investors can be high.

Having the upfront cash needed to invest in real estate can be challenging for some. However, fractional property investments could provide a solution.

This article looks at fractional property investments and how they can help you build your portfolio.

Let’s start by looking at what fractional ownership means as a broad term.

What Is fractional ownership?

Fractional ownership allows people to pool their money with others to invest in an expensive asset.

This model can apply to more than just real estate. People investing in Bitcoin is a good example.

At the time of writing, the current price for one Bitcoin is nearly £31,000. Most people who decide to invest in the cryptocurrency won’t own a whole Bitcoin rather a fractional share of one.

There are even examples of this model being used in the stock market. To invest, you would typically buy shares in a company. These shares are usually bought in whole amounts and represent your ownership of that company. For example, you may own 100 shares in Apple.

However, some platforms allow you to purchase fractional shares. These are smaller units of shares that often become available due to a stock split.

Investing in this way creates additional opportunities for people, making it a powerful tool. 

The entry cost can be high for expensive assets such as shares in a large company. Fractional ownership can help investors overcome capital limitations.

So, how does this all apply to an investment property?

How fractional property investment works

Although it remains a popular option, the standard buy-to-let investment model does have some drawbacks.

For starters, deposits as usually around 25% of the total property value. However, that figure can jump to 40% or more for expats or those investing from abroad. Another thing to consider is the work involved.

There is the running of the property to think about, as well as finding tenants. Of course, you can hire a property management company to take of this for you, but that comes at a cost.

Fractional property investing is different and works more like the stock market. But, instead of investing in company shares, you are putting your money into property shares.

Investments are usually made through a property fund, which buys commercial or residential properties. Then the fund manager will issue units of that stock in which people can invest.

Fractional investments vs timeshare

Fractional investments are often compared to another well-known ownership model – timeshare.

This model should not be confused with timeshare ownership as the two are very different. With a timeshare, you are buying units of time, as the name suggests. Often, timeshares are used as a vacation property rather than a way to generate a financial return.

With fractional ownership, the investor is buying into a tangible asset. In other words, you actually own shares in the title to the property.

What are the benefits?

The value of property in the UK has soared recently, making it a valuable asset.

A report from HM Land Registry found that the average house price in the UK is just under £275,000. The figures represent a 10.8% increase year-on-year.

Separate data from the Office for National Statistics found that the average house price increased in England (10.7%), Wales (13%), Scotland (11.2%) and Northern Ireland (10.7%) year-on-year.

For fractional property investors, there are several advantages. 

By its very nature, real estate is the polar opposite of what we would call a ‘liquid asset’. Selling shares is much faster than the selling process of a physical property. 

However, when you invest in certain property funds, you are buying units of shares. This means that selling your slice of the property is much faster.

You also have more control over how much money you want to commit. Let’s say you buy a house for £275,000. All of that money is tied up in that one asset. Also, the minimum investment amount for an entire property is high, especially if you need to put down a large deposit.

Fractional property investing allows you to invest smaller chunks and even spread your money across multiple properties if you wish. This is great from an asset allocation standpoint as it will help you create a diversified property portfolio.

There are also tax benefits to consider. Unlike physical real estate, a property fund can be held in an Individual Savings Account, or ISA. 

By putting them in an ISA, your investment is more tax-efficient, and you also have more flexibility.

Investing with confidence

Brick and mortar investments have long been a staple asset in portfolios.

However, the barrier of entry may be too high for some. For others, a traditional property investment may not offer the flexibility they want.

As with any other asset, it’s important that when you invest, you do so in a way that suits you and meets your goals. Speaking with an expert can ensure your money is in the right place at the right time.

Holborn Assets works with some of the world’s leading developers, allowing us to offer clients an exclusive range of properties in sought after locations.

We also offer a range of investment options. So, we can help you secure a property that meets your needs and goals.

To find out how we can help you, contact us using the form below.