Last updated July 8, 2022
Fractional is a new startup that allows anyone to invest in real estate with friends, family and strangers. Users form groups to invest in certain properties together. Group members own a share of the properties, depending on how much money they’re willing to invest.
The Fractional platform is for everyone – from novice investors who are just getting started in the industry, or seasoned pros looking to grow their empire. The intuitive design of the platform makes it easy and accessible for everyone, no matter your skill level. Real estate guru’s will also love how collaborative this environment feels.
What kind of real estate is listed on Fractional?
Fractional supports all types of real estate, with residential and commercial properties ranging from single-family homes up through multi hundred unit apartment buildings. In addition to co-investing in the existing listings on Fractional’s website, anyone can suggest properties the company adds as a new listing to their marketplace after leveraging multiple data providers to vet these based on criteria like financial estimations and risks assessments (e.g. hazard, flood, disaster zones, vacancy rates).
What services does Fractional provide?
The service is spread across six steps of the overall co-investing process:
- Platform: It provides a platform and user experience that allows anyone who lives in the U.S. to find like minded, pre-vetted investors they can co-purchase properties with
- Incorporation: Fractional creates a corporate entity for the group of investors that outlines operational processes such as voting, repairs, expense decisions and management, as well as changes in ownership
- Financing: Vetted lending partners help the newly formed corporation to finance their property
- Banking: Fractional provides a financial services package to help with the needs of an LLC. The service includes bank account creation, payments and withdrawals for rent or expenses from your property’s reserve fund.
- Purchase: An agent purchases the property on behalf of the LLC
How do you form investment groups on Fractional?
All users are vetted by the Fractional team. They’re grouped by their data that is collected during the onboarding process, and their interest in specific properties on the marketplace, which pools individuals by their share of ownership. In addition to co-investing with strangers, anyone can also form groups outside of Fractional and use the platform to leverage their services and get a 25% discount on Fractional’s fees. In addition to accessing these services at a lower rate, all of the partner services (real estate agents, attorneys, property management companies, etc.) are carefully selected, trusted Fractional partners.
How much money is required to start to co-invest in properties?
Investors can co-invest with only a couple of thousand dollars. Property prices and a user’s share in the ownership of properties varies by property, which determines the total investment. A property could cost $100,000, or $1,000,000 and the ownership percentage could be 1% or 10% based on the user’s commitment.
Fractional’s lending partners can provide mortgages for LLC-owned rental properties. Interest rates and required down payment amounts will vary based on the location, property type, as well as loan type that you choose to take out with them.
Another benefit for users is that they don’t have to be accredited investors and Fractional’s qualification process does only a soft credit check, which doesn’t affect the score, in addition to a standard review of income, assets, credit score and debt.
The benefits of Fractional compared to REITS and other crowdfunding platforms
Fractional is the next generation of real estate investing. For those that want to invest in a fraction of a house or apartment complex, Fraction provides many benefits with none of the usual restrictions or costs of other investments. You can own the properties outright. Not only do you retain ultimate control over when and how much you’d like to invest in certain properties (many platforms lock investors into long hold periods). While you can potentially lose up to 40% of rental income due to annual fees or taxes on other platforms, Fractional provides significant tax benefits and doesn’t have annual fees. Furthermore, dividends from other real estate investment types like crowdfunding platforms and REITs, increase income taxes and don’t offer the option for write offs and depreciation deductions. Fractional’s direct ownership model enables all co-owners to defer their taxable income (through expenses and standard rental property depreciation deductions) and defer their capital gains taxes (through the 1031 Exchange).
How do you make money from fractional real estate?
Directly investing in real estate and owning an actual share of properties means that you benefit from the increase in market value of these properties. Additionally, you receive a share of the rental income minus the Fractional’s fee and the cost of the property company that manages everything for the investors. Your rental income is based on your percentage ownership of the property. If you own 20% of the property, you will receive 20% of rental income less expenses. Rental income distributions are directly deposited via ACH transfers to your bank account.
How does Fractional make money?
Fractional charges a one time fee of 2% of the closing price of a property a group invests in, as well as monthly service fee of 2% of the rent. If the purchase price is $500,000 and the rent is $1,500, it would charge the group a $10,000 fee and $30 per month.
Who manages the property?
The company partners with vetted/trusted property companies that manage the complete process of finding renters and all related services, so that the group of investors doesn’t have to deal with anything related to the management of the property.
Who started Fractional?
The founders of Fractional, Carlos Treviño and Stella Han, both grew up in real estate families and worked together at ‘buy now pay later’ company Affirm. They received funding from notable investors like Y Combinator, Will Smith, Kevin Durant and others, and managed to acquire over 400 users in its beta, who invested together across 95 properties.
How can I start to invest in fractional real estate?
You can sign up on fractional.app here and go through the registration process. Once you’re an approved user, you can start to invest in the listed properties.