Fractional ownership: What you need to know

Understanding Fractional Ownership

Fractional ownership is becoming more mainstream! Investors globally are sharing in a piqued interest in the modern equity model, which has existed for quite a while.

The concept behind fractional ownership has already been applied to popular asset classes including art, luxury cars, private planes, and you guessed it… real estate.

What do they have in common? Well, first off, they’re expensive to acquire as a single buyer or investor. Secondly, they’re largely inaccessible if you don’t have the know-how and connections to get you one step closer to the purchase phase.

If you’ve invested with Stake before, then you’re no stranger to the fractional ownership model, which in our case here, can be referred to as fractional real estate investing! If you haven’t set up an account with us yet, it’s never too late to get started 🚀

Through fractionally investing in real estate, prime and luxury properties that were once deemed out of reach due to capital restrictions compared to the demanded market prices, have now been made both accessible and affordable to a diverse pool of investors worldwide.

New to real estate? Here are some tips to consider before you dive into investing

Breaking Fractional Ownership Into Pieces

Disclaimer - we wrote this piece on an empty stomach! 

Think of this model like a pizza - a group of people comes together to feast on it (correction, think of this model like a *very large pizza*) for which everyone pitches in to pay. However, the size of each pizza slice may not be the same for everyone.

Why? It’s simple: you get what you pay for. Pay a small amount and receive a small slice of that delicious cheesy goodness. Others who decided to pitch in a little more got a bigger cut.

Basically, your invested amount determines how much of the real estate property (or pizza) you own!

Still, many may get this approach confused with the traditional timeshare model, which we are here to clarify doesn’t work the same way. With a timeshare, you’re essentially paying to spend a certain period at the property you’re interested in. Through fractional ownership, you pay to own a part of a real estate property for a fraction of its full cost. This translates into ownership of equity, not time!

Some of the many benefits behind this model include a low buy-in cost, opportunity to diversify, and exert minimum effort! Let’s break down some of these pros before we dive into the cons.

Pros of Fractional Ownership

You can start small!

Remember the pizza analogy? It perfectly sums up our point - opting for fractional real estate investing implies you are not purchasing the property at its full market price all on your own, you are covering its cost with a group of investors who share a similar interest in it! No downpayments or mortgages are required to get started, as opposed to traditional DIY real estate which calls for more aggressive planning.

With Stake, you can get started in real estate investing from only AED 500 (approx. $136)

Diversify, diversify, diversify

Every investor’s magic weapon is diversification! When you commit a lower amount than you would have otherwise allocated for full property ownership to a partial piece in prime real estate, you are allowing yourself the choice to use your available capital more wisely. How? By pooling your desired investment amount into more than one real estate property, you are spreading out your risk instead of betting on one singular asset which may not pay off as you’d expected.

By diversifying your portfolio, you can choose between different neighborhoods, different property formats like short-term rentals or long-term leases, and different categories like prime or luxury. Now doing that will definitely pay off.

Make money while you sleep

Buffet said it best… “If you don’t find a way to make money while you sleep, you will work until you die.” Building a passive income stream is easier than you think! Fractional investing in real estate is one way to get started. How about that, Buffet?

All you have to do is invest your capital, and the property management team on the other side will take care of the rest. Landlord responsibilities, paperwork, maintenance, and property upkeep got you down? Not anymore. That is why being selective and intentional with your platform of choice is key as they will be in charge of all the behind-the-scenes work to ensure your investment is taken care of efficiently and effectively.

How will you make money? It’s simple with 2 core streams: monthly rental payments which create a consistent flow of income on a monthly or quarterly basis in the form of dividends and long-term capital appreciation through which your investment grows as the property value appreciates.

Gain access to more means of liquidity

One of the main issues investors in DIY real estate face are related to liquidity as it is highly complex, in terms of time and effort, to exit a property investment. Ultimately, however, this remains a core element of any investment whose process must be made simpler and faster.

By engaging in fractional real estate investing with Stake, investors are exposed to diverse initiatives that aim to bring access and liquidity to the forefront, one step at a time like:

• The creation of a consistent flow of income for investors derived from monthly rental payments.
• The rollout of the “Sell with Stake” product - enables independent sellers to sell their properties through our platform, hassle-free.
• The launch of our “Exit Window" (in March 2023) provides a simple, fast, and easy way for investors to not only sell their shares in a property but also purchase stakes in funded properties!

Cons of Fractional Ownership

You get a say… but so do the other investors

Once again, we revert to our pizza analogy. Assuming the money is collected before placing the order, we can imagine that there must be a selection process in place, right? Who gets to decide which pizza to order? There are so many flavors to choose from, which can be easily settled with a vote.

Investing fractionally in real estate and otherwise works that same way. With regards to any “material changes”, investors are prompted to vote on a way to proceed since they are the property’s owners at the end of the day. At Stake, we usually call for an investor vote in the following circumstances:

1. To sell the property
2. To convert the property into a short-term rental property
3. To change the property manager
4. To perform major maintenance of at least 5% or more of the unit value

As such, when you actively participate in a crowd-invested purchase, you are essentially consenting to share ownership and decisions.

So, we funded the property. What’s next?

The next steps are as follows and showcase exactly why this model works for investors seeking passive income!

Stake registers the holding company

We kick off the process of creating an SPV in the Dubai International Financial Centre (DIFC), which will hold the property on behalf of all investors.

The property will be registered under the SPV

We complete all the paperwork required to register the asset to the SPV and execute the transaction with the Dubai Land Department (DLD) in 2-3 weeks.

Investors receive the Title deed and Share certificate

Once this process is complete, investors will receive their share certificate and title deed via email, and these documents will also be attached to their Stake portfolio.

Investors will begin receiving rental payments

We will hand over the asset to our professional property manager and the first rental payment is expected to hit an investor’s Stake wallet at the end of each month!

What are you waiting for?

TL;DR | As prime real estate is expensive to own as a sole investor, the application of fractional ownership to real estate is rapidly gaining traction as it allows for:

• Access to high-quality assets that would have otherwise been unfit for limited financial bandwidth
• Reliance on the expertise of the company managing the asset on investors’ behalf
• Consistent dividend payouts
• Less administrative, landlord-like responsibilities
• More means of liquidity
• Fully transparent transactions

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