9 Things to Know About Fractional Ownership: Investing in Commercial Real Estate Together

With the cost of borrowing money rising and the value of each dollar stretched to its breaking point, some hoping to invest in commercial real estate are having second thoughts. The bar to entry is rising, and it can be challenging for those with little capital to invest — even in a cheaper, distressed property. Fortunately, there’s another approach: fractional ownership. Fractional ownership means investing with others as a group , a strategy that works for some who otherwise lack the means to invest in commercial property. 

Although fractional ownership is a great way to get started investing, there are a few things to know before diving in. Here are five pros (and four cons) to investing in commercial real estate with a group.

What is Fractional Real Estate?

Investing in fractional real estate allows people with less capital to build a diversified investment portfolio that includes property. Instead of being responsible for all the financial outlays and management of a property outright, a group of people pool their money to purchase real estate collectively.

How it works

Fractional ownership structures differ depending on the type of property being purchased, the number of investors, and other factors. Some investments are facilitated by companies or online platforms specializing in fractional real estate. In this case, the platforms do all the legwork: finding a property, managing the purchase, and offering shares to potential investors. It’s a great place to start for those new to fractional ownership.

More experienced investors might form a limited liability company (LLC) that purchases properties. This requires a greater understanding of real estate investing in general (and fractional ownership specifically) but eliminates the costs of paying extra to a company to do the work.

Regardless of the structure, most fractional ownership opportunities in commercial real estate set minimums lower than other real estate investments. Owners get a return on their investment either by receiving rental dividends or profits after selling a property. 

5 Pros of Fractional Ownership in Commercial Real Estate

1. It’s more affordable

Fractional ownership allows individual investors to purchase a percentage of a commercial property that might be otherwise out of reach. It opens the door to many who don’t have the capital to use a traditional ownership structure. Additionally, investing with a group means that the collective can purchase more expensive (and potentially more profitable) commercial space.

2. Maintenance and acquisition costs are shared

Individual investors bear the sole maintenance and carrying costs on commercial properties, but investing in fractional ownership means multiple people shoulder the responsibility. Maintenance, repairs, and other ongoing expenses can be evenly divided among all owners.The same goes for closing costs, taxes, and other fees associated with purchasing a property.

3. Fractional investment provides a flexible framework

For individual investors looking to use the commercial property they are investing in, fractional ownership provides a flexible framework. Some fractional commercial investing provides a deed and equity, while other contracts focus on selling property shares. Shares are typically purchased by another group and sold to investors — this is a more hands-off arrangement, similar to investing in a mutual fund. 

For some investments, fractional ownership means you also have an option to use a portion of the property. This type of investment is common for things like luxury homes or planes, but it’s also possible in commercial real estate. For example, if you need office space and are interested in being a more hands-on manager of a fractional investment, investing with a group means you can share the cost burden and still maintain the use of the property.   

4. It diversifies a portfolio

Instead of owning one type of commercial property, investors in fractional real estate can have shares in multiple industries. For example, a fractional owner might own a percentage of a medical building, a retail commercial space, and a manufacturing center. This protects that owner from taking too big of a hit if one property doesn’t do well. 

5. There is potential for appreciation

Above all, investors want to see their investments grow. In fractional ownership, investment properties have the potential for appreciation, which is realized when the investment property is sold. Appreciation is not unique to fractional ownership. But if the additional cost is keeping you out of more lucrative commercial real estate, this is a great way to get your foot in the door.

4 Cons of Fractional Ownership in Commercial Real Estate

1. Management is more complex

A single owner may have an easier time making decisions and managing a property than a group of owners. A real estate app can help simplify management, but it’s still something to consider if you prefer making unilateral decisions. 

With fractional ownership, decisions about the property and its usage are moderated by predefined agreements that limit what fractional owners can do. But consider the old saying: If you want to go fast, go alone. If you want to go far, go together. 

2. Your portfolio is less liquid

While real estate in general is not the most liquid of investments, selling via fractional ownership can be more challenging than selling a property by yourself. This would be like trying to sell a room in your house instead of the entire house. Advertising the property and finding a buyer poses different problems (such as getting the other owners to agree on the sale).

3. More potential conflict

When sharing management decisions and coordinating sometimes-opposing investment goals, the potential for conflict can be much higher. If contracts and agreements are not ironclad, minor misunderstandings can quickly blow up. Disputes might require legal intervention or mediation to resolve. 

4. Financing can be problematic

Although getting a loan for a fractional investment in commercial real estate is possible, these are rare and less likely to be offered through a small or local bank. Most opportunities in fractional ownership prefer cash. 

The Bottom Line: Is Fractional Ownership in Commercial Real Estate Right for You?

Ultimately, you’ll need to evaluate the pros and cons of fractional ownership to decide whether it’s right for you. Consulting with a financial advisor to walk you through your rights, responsibilities, and potential for profit is also an excellent way to get started. If you want to learn more, consider working with a realtor with experience in this type of investment. 

Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation’s leading real estate education platform for home buyers, sellers, and investors.