Mistakes to avoid in fractional ownership

Mistakes to avoid in fractional ownership

As everyone knows, investing in real estate can be profitable, but it can also have unfavorable effects if done carelessly. The Indian real estate market, which was once thought to be the home of traditional property ownership, is now welcoming co-ownership, opening up new opportunities for both potential property owners and investors.

The dynamic concept behind fractional real estate investing involves multiple investors collectively owning a portion of a valuable asset, often upscale homes or commercial spaces. Its ability to democratise property investment by enabling people to own a portion of real estate assets without bearing the entire financial burden is what makes it unique.

 This trend, which is already a worldwide success story, is picking up steam in India and has a lot of potential for people wishing to get into the real estate industry. The fractional ownership ownership system has given investors new opportunities, according to a JLL analysis. They can now envision themselves earning with increasing potential and owning a portion of a sizable commercial property.

Regarding fractional ownership, here are some mistakes you should try to avoid. Knowing these mistakes can help you have a good time and be successful in your shared ownership. Here are some important mistakes to watch out for:

Lack of Long-Term Strategy

Prior to purchasing any kind of real estate, it is important to establish clear objectives and a strategy for achieving them. Missed chances and rash decisions can result from not creating a plan. Real estate investing offers a wide range of options, and your strategy will be specific to your goal.

A long-term plan enables you to match your actions and resources with the results you hope to achieve and acts as a roadmap to assist in decision-making. It makes sure that well-considered plans, not impulsive, short-term decisions, drive your decisions, improving your chances of becoming a successful real estate investor and building wealth.

Ignoring the Location

In real estate, location is everything. It is important to take into account factors like the accessibility of amenities, employment opportunities, and transportation. Over time, properties in regions with robust economic growth generally see higher rates of appreciation. 

The location of the property also has a direct impact on its potential for cash flow and rental demand. Lower vacancy times, steady rental income, and a higher possible return on investment are all impacted by this. 

Buying properties in undesirable or decaying neighborhoods just because they fit your budget will not advance your finances; rather, it will cause setbacks. The potential for rental income and the long-term value of the property can be maximised by carefully assessing and selecting a desirable location. 

Underestimating Expenses

A common mistake made by a lot of investors, especially those who are new to the real estate market, is to overlook the costs that go beyond the stated purchase price. Both initial and recurring costs are frequently disregarded; some examples are as follows: 

Initial Costs

The kind of property, the financing options available, and the investor’s financial situation can all affect the payment requirements. 

Closing expenses

 Appraisal fees, title insurance, legal fees, and property inspection fees are some of the costs related to completing a real estate transaction.

Continuous Expenses

• Taxes on real estate: The assessed value of the property and the local tax rates can affect the taxes. Remember that unlike primary residences, rental properties are usually taxed as non-owner occupied or commercial, which can lead to higher rates.
• Coverage: Investors may need to get different kinds of insurance, such as property, liability, and flood insurance, depending on the location and kind of the property. Furthermore, landlord’s insurance is usually necessary for rental properties as an additional form of protection against potential liability and damage from tenants.
• Upkeep and repairs: In order to maintain the property’s condition, keep its value, and prevent future expensive repairs, regular maintenance and repairs are necessary. Renters might not take the same care of the property as the owner, so investors should budget more for upkeep and repairs.

Underestimating or failing to account for these costs can put a pressure on your finances and have an effect on the profitability of your property both now and down the road. This is particularly crucial because a lot of these costs are higher than what one would normally pay for a primary residence.

Making Emotional Decisions

In the world of real estate investing, where quick satisfaction and the fear of missing out are common, it can be difficult to avoid making emotional decisions. Nevertheless, letting feelings influence your choice of investments can be harmful. It may result in a number of unfavourable situations, including overpaying for real estate, making investments at the height of the market, or selling before your time.

Remaining rooted in your long-term plan is crucial to reducing emotional decision making, as opposed to letting feelings cloud reason and good judgement. 

Absence of a backup plan

Risks associated with real estate investing include shifts in the market, problems with tenants, recessions, and unforeseen maintenance costs. Throughout the investing process, investors can reduce risks and manage uncertainties by anticipating possible obstacles and having a backup plan in place.

The following are some usual financial risks you might run into when investing in real estate: 

• Unexpected costs: These may consist of renovations, repairs, or legal conflicts.
• Constraints on liquidity: Particularly if you own real estate directly, real estate is usually seen as a less liquid investment than stocks, bonds, and mutual funds. Selling a property can be a time-consuming process with potential expenses like closing costs or agent fees.
• Vacancy: The lack of rental income from a vacant property can have a direct effect on an investor’s cash flow. Even in the absence of rental revenue to defray ongoing costs, such as property taxes, insurance, and the mortgage, must be paid. A vacant property may also result in higher expenses, such as those associated with advertising to find new tenants. 
• Seasonal and economic factors: A downturn in the economy may affect the demand for rental properties. Tenants may find it difficult to pay their rent during recessions, so they may decide to downsize or move to a more affordable flat. Additionally, certain places may see variations in the demand for rentals; for example, certain seasons of the year may see a spike in demand for vacation spots.

Although this isn’t a comprehensive list of every risk associated with real estate investing, it does highlight how crucial it is to have a backup plan. It serves as a safety net, enabling you to handle ambiguities and giving you comfort. 

Poor Property Management

It’s crucial to take your desire for management involvement into account when creating your long-term plan for your investment property. Let’s say you choose direct ownership, in which case you have total authority over the asset. If so, it’s essential to hire a reputable property management company or set aside time to manage the property well on your own. You may avoid this obligation if you choose indirect ownership, but you still need to make sure the properties you invest in are being properly managed. 

Since fractional ownership can be complicated, Assetmonk makes it simple to manage your ownership, find the ideal property, and earn high returns. Additionally, we have a group of professionals on hand to assist you at every turn.

Bottom Line

You can improve your chances of having a positive experience with fractional ownership by staying away from these common mistakes. The rise in demand for commercial real estate is directly linked to the expansion of fractional ownership opportunities in India.

For investing in fractional ownership properties, Assetmonk is the best place for you.  Assetmonk has been leading the line in the emerging alternative real estate investment space, and seeks to provide investors with unique opportunities for fractional ownership of prime commercial properties with a high Internal Rate of Return (IRR) and flexible liquidity options.

For long-term retail investors looking to expand their exposure to the CRE market and diversify their portfolios, Assetmonk’s fractional ownership options offer a high potential earning yield of 14 to 21% annually.