In today’s evolving investment landscape, fractional ownership is emerging as a powerful model that allows multiple investors to purchase, hold, and benefit from a share of a high-value asset. Traditionally, such assets—like commercial real estate, luxury goods, or even art—have been available only to those with significant capital to invest.
Fractional ownership democratizes access by enabling individuals to pool their resources, lowering the barrier to entry and distributing both the risks and the rewards.
What is Fractional Ownership?
Fractional ownership in real estate is when a group of people come together to buy a house. Instead of one person paying the full price, each person contributes a part of the money needed to purchase the item. Everyone then owns a share of the asset based on how much they invested.
This concept can be applied to commercial and residential properties. The minimum amount needed to invest in fractional ownership can be as low as ₹20,000 for some items and ₹5 lakh for commercial properties, making it easier for more people to participate.
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Is Fractional Ownership Related to the Stock Market?
Fractional ownership of properties can be compared to investing in the stock market. Just like investors select specific stocks to include in their portfolios, they can also choose particular properties to own a fraction of. This allows investors to diversify their investments by adding real estate to their financial portfolio.
However, despite this similarity, fractional ownership is not directly connected to the stock market. While both involve sharing ownership and spreading investments across different assets, the nature of those assets differs. In fractional ownership, the asset is a physical property such as a house, apartment, or commercial building. In contrast, the stock market deals with shares of companies and other financial instruments.
How Fractional Real Estate Investing Works
Fractional ownership enables investors to buy a share of a high-value property by combining their funds with others. Here’s how it operates:
- Formation of an Ownership Entity: A manager or sponsor creates a legal entity to purchase the commercial property or asset.
- Division of Ownership: The entity allocates ownership shares to investors by issuing equity, membership units, partnership stakes, or other fractional interests.
- Raising Funds: Shares are sold to investors to finance operations, reduce debts, or support the development and maintenance of the project.
- Allocation of Costs and Revenues: Based on the ownership agreement, ongoing expenses and income such as rent, sales, or usage fees are distributed to the owners proportionally to their shares.
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Possible Models of Fractional Ownership
When choosing a fractional ownership model for real estate, consider the property type, applicable tax treatments, and which model is most economical and convenient for your needs. Here are the main models available:
1. Joint Ownership
- Shared Titles: All owners hold the title to the property equally.
- Usage Rights: Each owner can use the property without affecting others’ rights.
- Selling Shares: An owner can sell their share with the consent of the other co-owners.
- No First-Refusal: There is no obligation for co-owners to have the first chance to buy a selling share.
2. Cooperative Model
- Formation of a Cooperative Society: Investors create a cooperative society to purchase the property.
- Membership Shares: Each investor becomes a member and holds shares in the society.
- Transfer of Shares: When an owner wants to sell, their shares are transferred to a new fractional owner within the society.
3. Company Structure
- reating a Company: Fractional owners form a company and become its shareholders.
- Property Ownership: The company owns the property, not the individual shareholders.
- Regulatory Compliance: The company must adhere to the Companies Act regulations.
- Advantages: Potential savings on stamp duty compared to joint ownership and cooperative models.
- Responsibilities: Managing a company involves additional administrative duties.
4. Trust Structure
- Establishing a Trust: Owners create a trust with the property seller as the trust’s author.
- Trust Deed: A trust deed is executed to benefit the fractional owners, following specific guidelines.
- Tax Benefits: Potential tax advantages, especially if an offshore trust is established in a country with a tax treaty with India.
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Types of Usage of Fractional Ownership
When multiple owners share ownership of a property, each may have different ideas on how to utilize the asset. It’s important for fractional owners to agree on the usage of the property from the outset. There are two main methods to allocate usage rights:
1. Pay-to-Use Approach
- Usage Fees: Co-owners pay a fee based on the number of days or weeks they use the property.
- Expense Management: The fees collected, along with any rental income, are used to cover the property’s expenses.
- Surplus: If there is extra money after covering expenses, it is distributed among the co-owners.
- Shortfall: If expenses exceed income, all co-owners contribute additional funds to cover the difference.
- Investment Flexibility: Each co-owner’s investment is based on their financial ability and goals. The amount invested does not affect their usage rights.
2. Usage Assignment Approach
- Exclusive Usage Rights: Each owner is assigned specific days per year when they can exclusively use the property.
- Flexible Scheduling: The usage periods can be fixed, variable, or a combination of both, depending on the agreement.
- Freedom of Use: During their assigned period, owners can use the property as they wish or choose to leave it vacant.
- Proportional Ownership: The purchase price and usage rights for each owner are based on their share of ownership.
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Best Fractional Ownership Platforms
Below mentioned are the best fractional ownership platforms:
- Luxury Shares
- RealT
- Ember
- Strata
- Fraction
- Fractional
- Elephants
- BRXS
- RealX
- Assetmonk
REITs vs Fractional Ownership
| Aspect | REITs (Real Estate Investment Trusts) | Fractional Ownership |
|---|---|---|
| Regulation | Governed by the Securities and Exchange Board of India (SEBI). | Not regulated by SEBI. |
| Investment Allocation | Must allocate at least 80% of funds to income-generating properties. | No such requirement; funds can be invested in both completed and under-construction properties. |
| Costs to Investors | No maintenance fees or upfront costs charged to investors. | Investors are responsible for brokerage and maintenance fees. |
| Property Selection | Investors cannot select specific properties to invest in. | Investors have full control over choosing the types of properties they invest in. |
| Minimum Investment | Typically requires a minimum investment in the lakhs of rupees. | Minimum investments can start as low as ₹20,000 to ₹50,000. |
| Liquidity and Returns | Generally more liquid with consistent returns. | Properties have high potential but returns can be variable. |
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Advantages of Fractional Ownership
- Requires less capital compared to buying a property outright.
- Enables ownership of premium real estate that might be unaffordable individually.
- Allows investors to spread their investments across multiple properties, reducing risk.
- Maintenance, taxes, and other expenses are divided among owners.
- Investors can earn rental income or profits from property appreciation without active management.
- Owners may use the property during specific times based on the agreement.
- Possible tax advantages like depreciation benefits, depending on the structure.
- Properties are often managed by professionals, ensuring proper maintenance and operation.
Disadvantages of Fractional Ownership
- Requires consensus among owners, which can lead to conflicts or delays.
- Individual investors have less say in property management and usage decisions.
- Different investment goals or strategies can cause disagreements among co-owners.
- Selling a fractional share can be challenging and less liquid compared to traditional investments.
- Setting up and managing ownership agreements can be legally complicated.
- Returns depend on property performance and market conditions, which can be unpredictable.
- Legal and administrative costs to establish fractional ownership can be high.
- Lack of specific regulations may lead to risks, especially in emerging markets.
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Conclusion
Buying a home is a big step. Getting a home loan can be hard, but we make it easy. Choosing Credit Dharma for your home loan simplifies this process. We offer expert advice and personalized assistance to make everything hassle-free. You’ll receive timely updates on your loan application and disbursement progress.
From the initial application to the final disbursement, we provide comprehensive support. Enjoy clear and honest communication at every stage, with no hidden surprises.
Frequently Asked Questions
Yes, fractional ownership is legal in India. While there isn’t a specific regulatory framework governing it, such arrangements operate under existing laws like the Indian Contract Act, 1872, and the Transfer of Property Act, 1882.
Fractional ownership allows multiple investors to collectively own a high-value asset, such as real estate. Each investor holds a percentage share, entitling them to proportional benefits like rental income and appreciation, as well as shared responsibilities for expenses and maintenance.
Risks include potential disputes among co-owners over property management, limited control for individual investors, challenges in selling one’s share due to limited liquidity, and reliance on the property’s performance, which can be affected by market conditions.
Yes, you can sell your fractional ownership share. However, finding a buyer may take time due to limited liquidity in the secondary market for such investments.
Purchasing fractional shares can be advantageous as it allows investors to diversify their portfolios and access high-value assets with a lower capital outlay. However, it’s essential to consider potential risks, including limited control and liquidity challenges.
Fractional ownership is calculated based on the proportion of the total investment contributed by each investor. For example, if an investor contributes 25% of the total purchase price of a property, they own a 25% share, entitling them to 25% of the income and responsibilities associated with the asset.
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