What is fractional real estate investment?
Fractional real estate investment is a new-age concept where premium properties are co-owned by multiple investors making it possible for many to invest in high-end residential or commercial spaces with a smaller initial investment. Fractional real estate investment requires a premium property to be divided into multiple shares or fractions and each of these shares are purchased according to investments one can afford offering potential for diversification across different property types and locations. Investing in a fraction of a luxury apartment, vacation home, or student housing unit allows for partial rental income and capital appreciation. These properties come with lower rental yields but provide steady income.
Evolution of fractional investing in India
Property investment in the Indian market lacked clear regulations and was adopted only by high-net-worth individuals seeking alternative investment options for luxury properties. However, with new regulations introduced in 2021 by the Securities and Exchange Board of India (SEBI), there are guidelines for investor protection, disclosures, and operational processes attracting a broader range of investors including those with a more conservative risk appetite.
Steps for Fractional Real Estate Investment
The process of fractional property investment in India involves the following steps:
- Platform Selection: Research, compare, and evaluate various online platforms offering fractional ownership opportunities for their track records, regulatory compliance (SEBI registration), property portfolios, and investor reviews.
- Property Selection: Browse through available properties like the properties in Oragadam, Chennai, that include residential (luxury apartments, vacation homes) or commercial spaces (offices, retail outlets, warehouses). Assess factors like rental income potential, location growth prospects, and capital appreciation when selecting an investment property.
- Investment and Purchase: Upon choosing the property, the platform provides details like total property value, the number of shares available, and the price per share. One can then decide the investment amount based on their budget and risk tolerance. The online purchase process typically involves signing legal agreements and making the payment.
- Co-Ownership and Management: Having done property investment in India, one becomes a legal co-owner of the property, with the share reflected in the property title held by a trustee appointed by the platform. The platform takes care of all property management responsibilities, including tenant screening, rent collection, maintenance, and legal matters. One receives their share of the rental income periodically.
Development Stage: New Developments or Existing Properties
- New Development: Investors can participate in upcoming real estate projects through fractional ownership platforms and avail lower entry pricing due to pre-launch pricing strategies but can face risks like construction delays or changes in the estimated value upon completion.
- Existing Properties: Investing in an already constructed property provides more predictability, rental income history, and property’s condition but may be more expensive than new development properties.
Legal framework and regulations
Fractional property investment in India operates within the legal framework, with the Securities and Exchange Board of India (SEBI) playing a crucial role. SEBI has categorized fractional ownership platforms as Alternative Investment Funds (AIFs). In addition, the Real Estate (Regulation and Development) Act (RERA), 2016, complements SEBI regulations by protecting investor interests in real estate projects and protecting investors.
Benefits of fractional real estate investment
- Affordability: Fractional real estate investment enables investors to co-own high-value properties with a smaller upfront investment.
- Diversification: Enables investors to diversify their portfolio, mitigate risks and enable ownership in prime areas with investment in properties in Oragadam, Chennai.
- Risk Management: Fractional ownership platforms manage tenant screening, rent collection, and property maintenance thereby taking this responsibility off.
Risks and considerations
- Limited Control: Having done fractional real estate investment, one shares controlling powers over decisions with other investors potentially leading to disagreements.
- Liquidity Concerns: It may take longer to sell the shares than to sell sole ownership properties.
- Platform Dependence: Investors rely on the platform’s expertise for property management for which a check must be done thoroughly on the platform’s financial stability, experience, and fee structures.
Tips for first-time investors
Here are a few tips for those considering a fractional investment in real estate Chennai,
- Start Small and Diversify: Invest with smaller funds in a single property along with a diversified portfolio to mitigate the risk.
- Prioritize SEBI-Registered Platforms: Choose SEBI-registered platforms to ensure regulatory compliance and investor protection.
- Focus on Due Diligence: Make sure to evaluate the platform’s credibility, fees, and track record along with the property’s location, rental potential, and future value.
- Understand Exit Strategies: Check the timelines and procedures for selling the shares.
- Seek Professional Advice: Consult a financial advisor to evaluate risk tolerance and align your fractional investments with the overall financial goals.
- Use ROI Calculators: Make use of online ROI calculators to project potential returns on investment for fractional real estate Chennai opportunities.
Frequently Asked Questions
What is the minimum investment amount required for fractional real estate investing in India?
The minimum investment amount can range from INR 10,000 to INR 25,000, depending on the platform. Check each platform’s requirements and associated fees before investing.
How do investors earn returns from fractional real estate investments?
Investors earn returns through rental income, distributed periodically, and capital appreciation when the property is sold. Profits from sales are divided based on ownership shares.
What happens if a co-owner wants to sell their shares in a fractional property?
Co-owners can list their shares on the platform’s secondary market for sale. Some platforms may also facilitate direct sales. Check the platform’s policies on transfers, fees, and time frames for smooth exits.