Fractional Real Estate Investing -- What say you?

Question

Hey BP Community!I’ve been involved in real estate investing for a while but lately I’ve been bullish on fractional real estate investing. For those unfamiliar, it’s where multiple investors co-own a property, outsource property management & share rental income and appreciation.For those with experience, I’d love to hear your thoughts:

• What’s worked best for you?Commercial, residential, or vacation properties?
• Commercial, residential, or vacation properties?
• 
• How prominent do you think fractional investing will be in the next 5-10 years?
•

• Commercial, residential, or vacation properties?
•

Again, I'm personally bullish given that it lowers the barriers to entry while taking away a lot of the headaches that come with owning real estate. I know that a lot of folks want to be more hands-on in properties they own and that this isn't a model that will be a fit for everyone. However, this model can be beneficial for folks wanting real estate exposure in a more passive manner.

Thoughts?

Evan Polaski · Answer

@Michael Kazalas, personally this sounds like too many cooks in the kitchen, but also a very clear violation of SEC rules around material involvement.

Granted, I don't know much about fractional ownership other than vacation rentals, which are limited to 8 owners, typically.  Or timeshares which are a deeded ownership structure.

I don't know enough about this structure that you are envisioning, but I can't help but assume you are running afoul of something in one area or another that would limit interest.

Either too much active ownership in order to satisfy SEC definitions showing it isn't a passive investment.  This would make decision making hard, on top of likely needing owners to sign mortgage guarantees, etc.

Not enough involvement/too many owners, that you no longer satisfy SECs rules for involvement and it is really a security that needs registered or exempted.

Some middle ground, like DSTs or these other fractional ownership, where the admin work is so intensive that fees need to be higher to make it worthwhile for the operator.

Then again, I am drawn to real estate, so by nature drawn to traditional, proven structures.  But I am curious to hear how this really is different than just a JV or syndication.

Joseph Cacciapaglia · Answer

I've spent quite a bit of time experimenting with a couple of these sites lately. There are a lot of interesting opportunities, but also a lot of kinks to work out. I think they're a great way for someone with very little capital to get some real estate exposure and to learn a ton about investing along the way. I also think there is a decent use case for people with more capital that want to diversify their risk, but also want to select individual properties. In the last couple of months I've bought ownership interests in 20 properties and 51 mortgages, all while sitting on my couch.

Terra Padgett · Answer

I’m all for fractional ownership. Haven’t done it on SFR, but I’ve done several commercial investments where I own a fractional share. It certainly breaks down the barriers to entry so that you can spread coins across a wide array of assets and markets. You’re able to share knowledge, experiences, resources, and risk. Spreading smaller amounts across a lot of different investments also de-risks your overall portfolio. I’m very bullish on Passive Investing and creating multiple streams of income (mailbox money as some would say) and see this route as an effective way to achieve that.

Evan Polaski · Answer

@Michael Kazalas, I tend to agree with Chris on Mogul seemingly operating, at best, in a grey area of SEC rules.  For $250 minimums, and only $9mm of GAV, probably not really too much concern.

If their platform starts growing exponentially, I would be concerned about their focus to make sure you investments continue performing when they are likely to be very distracted by SEC investigators.

There are many ways to skin a cat in syndication.  And the puzzle includes many pieces that need put together.  Reg A and CF allow for non-accredited investors.  Reg D 506(b) allows for unlimited fundraising and up to 35 sophisticated investors.  506(c) requires accredited investors.

There are trade off to each, but they are each very clearly allowed within SEC rules.

An investment club, like some on these forums, that are simply bringing people together to review other people's deals are generally okay.  Where I see big issue with mogul is: they are sourcing their deals and raising money for those deals through their own platform.  Presumably, they are taking fees, and likely some share of the profit for their deals.  By doing so, they are no longer acting as an investment club in my eyes, they are a true syndicator that is trying to thinly veil themselves as something else, in order to not have to follow SEC rules.

Chris Seveney · Answer

I would be very careful on that investment as quick research shows mogul club has not registered for any SEC exemption and I am not an SEC attorney but this to me is not even close to being kosher with playing by the rules.

Also I die when I read "mogul is the first real estate investing platform started by real estate investors, for real estate investors" --- yes they are the first platform. I guess fundrise and others do not count....

Sam Levin · Answer

I've seen some clients do this with great results. One thing I'd think about is that some of the retail products which do this seem to be useable in a 1031 exchange and some not, so I'd keep that in mind when selecting what to invest in, if 1031 exchange is part of your strategy.

Michael Kazalas · Answer

What is the hoary test?

Jay Hinrichs · Answer

I wonder how this works with the Hoary test..

I thought you were talking about TIC's  those can work. For like kind investors.

Michael Kazalas · Answer

They are VC-backed by Tim Draper and other reputable VC's. Co-founders are also ex-Goldman Sachs real estate private equity. I have comfort that their legal team checked off the necessary boxes.

I don't look much into the tagline - they're meant to be catchy. I think that line was a subtle shot against a lot of the competition who were founded by software folks or small scale real estate investors.

Michael Kazalas · Answer

@Evan Polaski @Chris Seveney Yes Arrived is one of the many that operate this way. There's no SEC violation as each is set up as an investment club -- properties are purchased in LLC's and investors buy in to the LLC.

Chris I agree that the administrative burden drives minimum investment amounts higher to make sure the juice is worth the squeeze to the sponsor. The more forward-thinking fractional companies are utilizing blockchain technology to automate a lot of the backend to help with this.

Mogul Club is a company that has $250 minimums and their assets on platform average 18.8% IRR. I'm invested in 3 of their properties right now and they pay rental distributions monthly.

Fractional Real Estate Investing -- What say you?

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