What Is It And How Does It Work?

February 3, 2024

5 2 minutes read

The skyrocketing home prices and mortgage rates have triggered an unaffordability crisis in the U.S. Most Millennials and Gen Z believe it is harder for them to buy a house compared to their parents, especially as mortgage rates hit 23-year highs at 8% last year.

Fractional real estate is emerging as a game-changer, offering an innovative solution to the affordability crisis. This opportunity allows individuals to invest in real estate without having to bear the burden of purchasing an entire property. Instead, investors can buy a fraction or share of a property, enabling them to participate in the real estate market with a smaller financial commitment.

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Understanding Fractional Real Estate

Fractional real estate, also known as property fractionalization, is a concept that enables multiple investors to collectively own a share of a high-value property. This approach makes real estate investment more accessible to a broader range of individuals, breaking down the financial barriers that often come with purchasing a property outright.

Instead of owning an entire property, investors can acquire a fractional ownership stake, which is proportional to their investment. This model helps democratize real estate investment, allowing a broader range of individuals, including Millennials and Gen Z, to participate in the market.

A Platform Backed By Jeff Bezos Leading The Movement

Arrived, a Seattle-based real estate platform established in 2021, facilitates fractional real estate investing by allowing investors to buy partial stakes in income-generating rental properties across the U.S.

Backed by Jeff Bezos, Arrived owns $128 million worth of real estate invested across 361 properties so far in early 2024. The fractional real estate platform paid out roughly $2.8 million in dividends in 2023. Investors can begin investing in real estate with as low as $100 through Arrived.

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Are REITs A Better Option?

Real estate investment trusts (REITs) have been the traditional alternative investment approach towards real estate, as investors bought shares of publicly traded companies that own or finance a robust portfolio of properties. REITs typically have high yields, as they are required to distribute at least 90% of their net earnings as dividends to shareholders.

One of the most popular REITs is Realty Income Corp. (NYSE:O), often known as the monthly dividend company. The REIT, which owns more than 13,250 properties, has raised its dividend payouts 123 times since its stock market listing in 1994. Realty Income currently pays $3.08 in dividends annually, yielding 5.6% on the current price.

As the name suggests, real estate properties are held in trusts and managed on behalf of shareholders in a traditional REIT structure. In contrast, Arrived, which operates as a fractional real estate platform, buys properties through a Series LLC. Thus, if an individual purchases a 5% stake in an Arrived single home offering has a 5% economic interest in the asset, including income from the property and capital appreciation.

One of the key advantages of REITs is liquidity, as investors can easily buy and sell their shares. Publicly traded REIT shares are subject to market conditions and can be significantly impacted by market volatility. However, REITs often incur significant management expenses, as the total real estate portfolios are professionally managed.

Bottom Line

While REITs have been a traditional avenue, Arrived offers a unique approach through a Series LLC, providing investors with a direct economic interest in assets. As real estate evolves, fractional ownership could prove to be a game-changer, expanding opportunities for a diverse range of individuals in the real estate market.