The Basics of Fractional Investing

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Funding Souq Editorial Team
Tech Writer
Oct 18, 2024
Funding Souq’s editorial team comprises experienced finance and investment professionals that are on a mission to fuel SME growth, create jobs, and drive the economy forward. They aim to share their extensive experience and industry know-how to empower entrepreneurs and investors alike.
Oct 18, 2024
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As global asset and property prices continue to grow on the back of rising inflation, home ownership or owning a wealth-oriented stock portfolio is fast becoming a dream for a greater portion of the youth middle class segment.

 

Seeing this gap in the market, a number of financial institutions as well as fintech and proptech platforms have begun offering fractional investing options to allow investors with few savings to participate in the property and financial markets. 

 

What is fractional investing in real estate?

 

Fractional investing is when an investor buys a share in an asset unit or property alongside a number of other investors. When it comes to real estate, fractional ownership sees a number of investors collectively buy into a single property, sharing in the benefits and responsibilities related to that property.

 

These benefits include financial gains from the sale or renting out of the property, as well as access and usage rights to a portion (or whole) of the property. Shared responsibilities include collective management and decision-making of said property, in addition to contributing to the maintenance and remodeling of the property.

 

Fractional ownership in real estate is not new, and has existed for almost as long as property rights have.

 

It is something that is witnessed every day, with buildings (and the land they are on) being collectively owned by the apartment owners. Timeshares are also another common example of fractional ownership and investing. 

 

How does fractional investing in real estate work?

 

In the case of real estate, typically fractional ownership in a specific property is managed by a real estate or property management company. What these companies do is sponsor the formation of a legal entity that will take ownership of the property.

 

This entity is formed in order to divide the economic benefit according to ownership percentages as well as centralizing the management of the property with the sponsor. 

 

The entity will then be divided according to a variety of different ownership units, including issuing shares in the entity and partnership stakes. These units are then sold off to investors whose level of ownership will be determined by their contribution and how many ownership units they buy.

 

These fractional units will then confer rights and benefits to the eventual owner in the units, including a share of the financial income or usage rights pro rata to how much they invested.

 

What is fractional investing in stocks?

 

Fractional shares are a much newer innovation. As prices of blue-chip stocks globally have risen, it has become harder for retail investors to own a single share in a large company.

 

With fractional shares investors buy a fraction of a single stock, bond, or exchange-traded fund. Dividends on individual shares that are collectively bought are divided among the investors based on their contribution. 


Read more about: Halal ETFs Investment Guide


How does fractional investing in stocks work?

 

Owning a fraction of a share of a listed stock works in a manner similar to owning an ordinary share. Owners of that stock receive the dividends from it and / or the proceeds of the sale of that stock that is then divided based on the proportion of ownership in that single stock.

 

 It does, however, come with limitations to decision making in the company and the share itself, but that can depend on the offering provided by platform used.

How it typically works is that a brokerage or online investment platform will take possession of the stock and then market it to retail investors.

 

Some platforms may wait until they have enough funds to purchase a whole stock before executing on a trade. Some brokers will take advantage of company stock splits to buy and sell fractional shares. 

Read more about: Top Halal Trading Strategies

How does fractional ownership in real estate differ from REITs?

 

REITs are companies that own or finance income-producing real estate that must payout dividends of around 90% of the real estate portfolio’s taxable profits annually to investors.

 

 An investor receives an annual return based on their level of ownership in the REIT. REITs are typically listed in a stock exchange and investors buy into them the same way they would a stock or an ETF.

 

REITs are a form of indirect ownership in a portfolio of properties that are subsequently listed on an exchange to the wider public. It is ownership in a security that confer very little rights to the owner with the only real benefit being the dividend payout.

 

Fractional ownership of real estate is a form of a shared ownership in the property that confirms more rights to the individual owner, including usage rights. Unlike REITs, they are not liquid, meaning an investor cannot quickly buy in and buy out of them. 

 

Read more about: Conventional REITs vs. Islamic REITs, Exploring The Differences

Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.

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