Investors had a glimmer of hope last week as the stock market tried to recover some of its June losses, but it appears that the S&P 500 will suffer another month of losses. Even many of Warren Buffett’s favorite stocks are suffering. Apple Inc. AAPL is currently down about 7.5% for the month and Bank of America Corp BAC is down nearly 16%.
Touted as being a recession and inflation-resistant option, real estate investment trusts (REITs) aren’t performing much better. Store Capital Corp STOR is down about 4% and the benchmark REIT ETF, the Real Estate Select Sector SPDR Fund XLRE is down nearly 7% for June.
The frustrating part for many investors is that the fundamentals for many of these companies haven’t really changed. In fact, some are generating more revenue and higher earnings per share than last year, but are trading at 20% to 30% lower prices. This is one of the downsides to the stock market; share prices have wild swings based on little more than emotional reactions.
A growing number of retail investors have been turning to assets without the exhausting volatility. Perhaps the most popular option among the retail crowd right now is fractional real estate. The process of investing in fractional real estate is about as simple as buying stocks, aside from needing to set up an account on a new platform.
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The benefit to this type of investment is that the value of property shares has a very low correlation to the stock market. Real estate values tend to move much slower than publicly traded equities so when the market panics and starts selling stocks, the share value of real estate assets tend to remain pretty consistent.
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The other major benefit to fractional real estate is that it provides passive income through all market cycles. Even if real estate values start falling, the assets continue to provide cash flow through the rental income while waiting for the market to turn around.
The downside to this type of asset, in many investors’ eyes, is the limited liquidity. Unlike publicly traded stocks, single-asset real estate shares typically can’t be sold instantly. However, this is one of the aspects that allow for price stability.
A handful of fractional real estate issuers have secondary trading platforms and there are more coming in the next few months. While this does provide some options for liquidity, the market size is too small to guarantee that there will be a buyer immediately available to fill your sell order.
Ultimately, real estate has historically performed best as a long-term investment and investors should go into fractional real estate ownership with the intention of holding their shares long-term.
How to Invest in Fractional Real Estate
There are a number of options available, depending on whether you’re an accredited investor or non-accredited investor, the amount of capital you want to invest and your risk tolerance.
Thanks to the Regulation A+ process being streamlined over the past few years, there are now multiple investment platforms available for non-accredited investors. For instance, Arrived Homes offers shares of rental properties with a minimum investment of only $100. This company has seen a major increase in demand from investors and has actually doubled the number of active investors on its platform over the past two months.
Other companies, like LEX-Markets, regularly have IPOs for single-asset commercial real estate investments that can then be traded on the secondary market. Share prices for these IPOs are typically $250.
Accredited investors have more options, but most of them come with minimum investments of at least $35,000. Platforms like RealtyMogul have multiple offerings available for multifamily and commercial properties and the average historical annualized return on realized investments is about 17%.
Fractional Real Estate vs REITs
Real estate investment trusts (REITs) have been a popular option for passive investors to gain exposure to real estate, but this type of real estate investment is still vulnerable to stock market volatility.
For example, one of the most popular REITs, Realty Income Corp O has added several properties to its portfolio in the last year, increased its total revenue by about 45% year over year, its FFO per share by almost 29% and its dividend payment by about 5%, yet its share price is down 4% year-to-date.
REITs are also known for diluting shares fairly regularly in order to fund new acquisitions or pay down debt. With fractional investments, the percentage of the property you own will remain the percentage you keep. However, there are some benefits to REITs, including greater liquidity. REITs also allow you to have an investment in an entire portfolio with a single share.
Luckily, you don’t have to choose just one type of asset to invest in. Most financial advisors would agree that a healthy portfolio is one that’s diversified across multiple investments. The same holds true for the portfion of your portfolio that’s allocated to real estate.
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