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In a previous entry, we explained what fractional investing is and how they work, both in real estate and in financial instruments.
As with all things finance, there are advantages and disadvantages to fractional investing that have to do with the rate of return on investment, risk management, and time horizon for the investment. We explore these advantages and disadvantages here today.
Read more about: The Basic Guide of Fractional Investing
Fractional ownership was designed to allow those without sufficient funding to purchase a house or stock to buy a portion of the asset and reap a portion of the benefit. As such, they do not require as much financial commitment from the fractional owner.
Depending on the income of the investor, fractional investing gives them access and ownership in properties and stocks they wouldn’t normally be able to own individually.
These are typically assets of higher value that have been appreciating for some time and can reasonably be expected to continue appreciating if the fundamentals remain constant.
As with the purchase, fractional investing spreads the costs of maintaining and managing a property among a pool of owners and investors, making the costs to an individual investor far less.
Furthermore, the responsibilities of managing the property is also collectively shared, reducing the commitment of time and effort by an individual owner. This is more pertinent to fractional ownership of real estate properties, as there really aren’t many shared costs and responsibilities in fractional ownership of shares beyond the initial buy-in.
Sharing ownership and the costs of ownership also limits the losses that can be incurred in the event of asset losing value or damage in the property, as the losses are diffused through the entire ownership base.
By owning a fraction of an asset a portion of an investor’s wealth is freed up to diversify into other assets.
Diversification is one of the key elements of risk management, going by the adage of not putting all one’s eggs in one basket. Similarly, it can offer the investor multiples on their investment if the portfolio is selected prudently enough.
When it comes to both property and financial instruments, having a lack of flexibility when it comes to managing the asset is one of the most glaring disadvantages of fractional ownership.
It is very difficult, for instance, to exit a property if needed, or selling a portion of your stake in a stock may require there by another person ready to buy that stake.
Being unable to exit an investment when needed will limit one’s ability to convert the investment into cash when needed, which is a factor when analyzing the value of an asset.
As the investor isn’t the sole owner of the asset, they will undoubtedly have to share control and, hence, be limited in what they can do with the asset at hand. An individual owner of a property can make alterations and upgrades to that property if they deem it necessary.
In a fractional ownership situation, control falls under the purview of all owners or the sponsor that is managing the property, leaving the investor with very limited control. This can also be applied to fractional shares, as some of the shareholders rights that come with owning a stock cannot be exercised as easily if one owned the full share.
Similarly, fractional investors in a property can have very limited control on their usage of that property when compared to a full owner of the property. Timeshares that are collectively owned, for example, can limit the access of one of the owners to the property for a very short duration out of the week.
Since owning an asset collectively reduces the risk, it also reduces the rewards that come from the resale of the asset. Depending on the size and value of the asset, any returns from it can be underwhelming compared to the returns from owning the asset outright.
In real estate, this could be receiving a small share in the rent. When it comes to stocks, dividends are usually determined by the company’s board, and usually are a fraction of the value of the stock. Dividend payouts in a fractional share can be so low, it may not be worth investing.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
