One of the most common questions asked by investors before making an investment in fractional ownership deals with "how and when" can they get out of the investment. The reason behind it is quite simple. While generating rental income and appreciation of property value may be enticing enough, having clarity about your exit plan is equally important for your finances.
The best part of fractional ownership investments is that they have structured investment plans, but it's different across different platforms. Having knowledge about this process prior to making an investment will help you make better financial choices.
Factors That Will Determine Your Exit Strategy?
While stocks can be sold instantly, fractional ownership investments are linked with physical real estate assets. Commercial properties being long term investments means that there will be an exit strategy in place.
These strategies depend upon several factors such as:
- The investment plan of the platform
- The holding period of the property
- If lock-in period exists
- Buyer availability in secondary market
- Performance of the property
Different platforms operate under a different investment model.
Lock-In Period?
A number of fractional ownership programs provide a lock-in period during which there will be enough time to earn money through rentals, as well as for an increase in the asset value. The only downside of such a program is that the investor will not be able to withdraw quickly.
But the length of the lock-in period may vary depending on the particular investment opportunity. Some investments have a short lock-in period, whereas others are created for long-term financial gain.
It is always necessary to examine the documents thoroughly.
Can One Withdraw Before the Investment Ends?
In certain situations, one can.
There are various fractional ownership schemes that provide secondary markets, whereby an individual can sell his or her ownership stake in the property even before its final exit period. Instead of waiting until the whole property is sold, you could sell your stake to another individual who is interested in it.
This will depend on:
- The availability of buyers
- Policies of the platform
- Market demands
- Performance of the asset
Since fractional ownership deals with real property, it takes some time to find a buyer.
What Occurs Upon Final Exit?
Upon reaching the expected exit stage for the investment, the asset will be sold, and the gains realized are divided among the investors proportionate to their ownership stake.
- Depending on the performance of the asset throughout the investment period, there may be gains from:
- Rentals received during the ownership period
- Capital appreciation
- Repayment of the initial investment after the sale of the asset
- Gains will depend on various factors, such as market environment, occupancy rate, asset demand, and asset performance.
- Points to Consider Prior to Investing
Prior to investing in any fractional ownership asset, it is imperative to know:
Is there a lock-in period? What is the investment horizon expected?
Does the platform offer a secondary market? What is the procedure for reselling the asset?
Are there any costs associated with reselling the asset?
Does the platform help find buyers for investors?
Knowing the above will allow you to have an idea of how flexible your investment will be.
Concluding Remarks
The use of fractional ownership has increased access to premium commercial properties for those seeking to be a part of income generating assets but cannot afford to buy an entire building. Apart from the positive attributes associated with the type of investment such as portfolio diversification, professional management, rental income and ability to generate wealth, it is imperative to consider the exit strategy.
For any type of investment, success is not only determined by the selection of the right property but also knowledge on when and how you can get out of the venture. It is through the review of the investment terms and resale options offered that you will be in a position to invest confidently.
When making an investment in commercial real estate whether for the first time or otherwise, always remember that the exit strategy should be taken seriously.
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