Becoming a real estate investor has always been an attractive proposition. After all, property values tend to appreciate over time. There’s also the perception that buying a rental property and becoming a landlord delivers passive income with little to no downside.
The challenge? Investing in real estate usually takes a lot of money upfront, especially since home prices soared during the pandemic and have stayed high for the most part. But over the past few years, several investing platforms have emerged that offer what’s called fractional ownership (and no, you’re not owning a house with your best buds).
With this model, you can own a “slice” or fraction of a rental property along with other investors and share in the profits generated (as well as any losses). Since you’re not buying the property alone, you can own part of a home for a much lower cost. There’s less risk of a significant loss and you avoid the day-to-day management of the property (that’s taken care of by the investment company - for a fee, of course).
For example, the online real estate investing platform Roofstock requires a minimum investment of only $5,000. Arrived, another online investment platform, uses crowdfunding to buy rental properties, with investors becoming fractional owners for as little as $100. The typical rate of return on investments made on these platforms ranges from 2% up to 12%.
According to Bianca D’Alessio, founder of the Masters Division, the top producing team at Nest Seekers International, these companies can be valuable to people looking to get their feet wet as real estate investors because the cost to acquire the property is so low. But they also provide other benefits.
“They do allow you the opportunity to diversify your portfolio, which you don’t normally see from a first-time investor,” D’Alessio tells me.
However, as with any other type of investment, there are risks. You need to do your homework before parting with your hard-earned money. These steps can help:
- Find out what you’re investing in. Learn about the property, the type of home (or condo) and the location. In other words, read the fine print on each property the platform manages.
- Compare investment platforms and evaluate the risks each may have. Properties can lose value, so a positive return isn’t always guaranteed.
- Learn how the property is managed. Is there insurance to protect assets?
- Know how and how often profits are distributed.
According to D'Alessio, the other factor you need to consider is your investment goal. Are you using this to make some cash on the side or counting on this investment as part of your regular monthly income?
Have any readers used an investment platform to buy a fraction of a home? If so, I’d love to hear about your experience. Email me at leslie@money.com.
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