Fractional Real Estate Investing

[lucidsamples]

I recently bought a house together with ppl in my network b/c it’s just too expensive alone in the Bay Area. The property just got rented out and we’ve now got shared rental income as well! People have been really interested in how we figured out the legal agreements, holding title, property management, etc.

For that reason, we’ve been working on Fractional, a concierge platform for co-owning and co-investing in residential properties. We’ve got a team of real estate agents, attorneys, and property management partners who have helped to really streamline the process and taken away the friction/difficulties of organizing and maintaining a traditional syndicate. Investors on our platform are required to make an all-cash offer on their share of the property -- no mortgages allowed unless you are buying with family/friends.

This should be valuable for anyone interested in:

1. getting a jumpstart on home ownership - buying a property to live in w/ family or friends
2. investing in real estate for appreciation and passive income (rental) - this is great for in and out of state investments
3. diversifying their real estate investments while enjoying tax benefits (having direct ownership of fractions of multiple properties rather than 1 entire property -- REITS don't have any tax benefits)

Would appreciate any feedback on how we can make this better Home affordability is a huge problem and we’d love to make a difference!

 

[613jono]

@lucidsamples Mate as soon as you take leverage out of the equation, real estate investment does not work. Just run the numbers man. So you need to find a way to add a loan.

Edit: that being said, nice job implementing this

 

[apotheosis00]

@613jono Hi, could you elaborate why this idea doesn't work without leverage? You still get house appreciation with rental income as well, just split up, no? I thought OPs idea sounded great.

 

[613jono]

@apotheosis00 OPs idea is a great one. I've thought about it myself but didn't have the ability or motivation to put something together as well as he has.

Regarding leverage, this is a very important concept they ought to teach more in school. I don't know how people can become financially independent without understanding this. Here is goes:

- The real estate market is already priced assuming market participants are able to obtain 30 year loans at rates 3-4%

- this means that market participants not using leverage will earn far far far inferior returns versus others, meaning they are not competitive, meaning it is an inefficient investment (i.e. not worth it)

- The effect of leverage is that you basically are basically able to risk someone else's money, while maintaining all the upside, but also the downside

- Leverage is most effective when you have long-term contracted cashflows, the stability allows borrowers to mitigate downside (default risk) while still keeping the upside. Hence why real estate is ideal

I started typing out an example, but there are some great videos online. here is one with an example

 

[apotheosis00]

@613jono Thats a nice explanation of leverage But I am still a little confused why OP's app would remove that leverage. Wouldn't there still be a loan with interest? I thought it was like the same thing except you just split the payments, like splitting rent cost with a roomate. That way with the same ammount of money to pay for one house, you can go in with a bunch of others so its more diversified! I may be wrong on this one though.

 

[613jono]

@apotheosis00 OP is talking about buying a property with 100% cash.

No one in the market is doing this, unless they are ultra risk averse or are a developer with some bigger plans.

I am talking about buying a property with 20% cash, and 80% debt. HUGE difference.

The reason OP had to cut leverage out, is because it gets complicated to get a loan when there are multiple owners, multiple incomes, multiple names on title? I don't know, it's a mess. But Real Estate CAN be done fractionally with leverage, because it is the ideal profile of asset for non-recourse financing.

So you probably need to find a bank that doesn't care who owns the property, and is only lending based on the earning power (rents) of the property

 

[apotheosis00]

@613jono OHHHH that makes way more sense, thanks for clearing that up. Hope OP can figuer something out.

 

[lucidsamples]

@613jono Oops somehow I missed the notifs, exactly that [sup],[/sup] it becomes really really messy. We were trying to protect co-investors but that took out the leverage will figure something out!!

 

[613jono]

@lucidsamples Yes there is definitely a solution! Please let us know how things go. I am very interested in this

 

[lucidsamples]

@613jono I def see your point on how some investors my feel that way. What are your thoughts on those who invest in traditional REITs or even platforms like Cadre? Can’t really take out a mortgage on those either

 

[613jono]

@lucidsamples There is already leverage behind the stock. You buy into leverage with REITs.

 

[pat55tan]

@lucidsamples REITS are indicies where the underlying asset is leveraged lol.

As soon as I saw no leverage, I stopped reading. Sorry bud.

 

[lucidsamples]

@pat55tan No worries, thanks for the feedback! We’re gonna have to rethink some of the co-investing part on how to protect investors but also be able to have that leverage.

 

[vicy82]

@lucidsamples Have to use leverage.

That being said, you should look into how GPs organize one-off commercial real estate investments and seek to emulate that on a smaller scale.

Who is responsible if rent can’t cover the expenses plus debt service?

How do you decide when the property gets sold or refinanced?

Who takes care of maintenance/maintaining a property manager?

Basically, how do you reconcile partial ownership of the property with the issue of having too many cooks in the kitchen as far as decisions go.

I can tell you that the real estate deals I’m in have a GP (General partner) who is responsible for all of that and takes a management fee of 1%-2% of asset value per year and also a profit share of 10%-20%. They handle everything I listed and more including issuing K-1’s and financial reports and everyone else is a passive investor.

You might look into that as far as this idea is concerned.

 

[lucidsamples]

@vicy82 These are great points and definitely things we need to flush out more! Just curious, are the deals you’re part of powered by tech companies or is it more of a traditional syndicate? What drew you into those deals compared to some other real estate investment options out there?

 

[vicy82]

@lucidsamples These are larger multi family deals with GPs my firm has had relationships with for years so a lot is proof that they can generate the returns.

No, we don’t invest with Cadre or Fundrise or anything like that. Although you might benefit from looking at iBuyers if you’re thinking of going down a tech route for identifying your investment properties. It could save you money on infrastructure.

 

[dakota95]

@lucidsamples interestinggg... is there protection around other owners not paying their share of the expenses, or in general i don't want to be liable for other people's mistakes

 

[lucidsamples]

@dakota95 We’re currently thinking of automatically deducting expenses from the rental income. Working towards sorting more details out on making sure people are only liable for their own responsibilities.

 

[apotheosis00]

@lucidsamples OP your site seems really nice. I don't have any money to invest but I wish you the best of luck You will figure out all the kinks

 

[lucidsamples]

@apotheosis00