Fractional Real Estate vs. Real Estate Crowdfunding

Both raise money from many small investors online, and both grew out of the US JOBS Act of 2012, which created the exemptions (Regulation Crowdfunding, Regulation A+) that let platforms sell property investments to the public. Both let you start with a few hundred dollars, both are managed by someone else, and both are less liquid than a stock. Fractional real estate is, strictly, one kind of real estate crowdfunding: the kind where what is being crowdfunded is ownership of one existing property. The distinction matters because the rest of crowdfunding is quite different.

Most real estate crowdfunding falls into three buckets. Debt deals: you lend money, through the platform, to a developer or a house flipper. You earn a fixed interest rate, often 8% to 12%, for a term of six months to three years, and you are repaid when the project sells or refinances. You own no property. Your risk is that the borrower fails to repay. Development equity: you buy a share of a project that does not exist yet, a building to be constructed or renovated. Nothing is paid until the project completes and sells, typically two to five years out, and the projected return depends on construction going to plan. Funds: platforms such as Fundrise pool investor money into a diversified fund that buys many properties. You own fund shares, not buildings, and you cannot choose the assets. All three are real investments with real track records. None of them is ownership of a specific rental property you picked.

A fractional platform lists a specific property, already built and usually already tenanted, with its address, photos, rent and projected yield. You buy shares in the entity that owns it. From the first month after funding closes, your share of the net rent is paid out, and when the property is eventually sold you receive your share of the proceeds. The defining features: you choose the property, income starts almost immediately, the property is a finished asset rather than a project, and your ownership is a share of equity rather than a loan. Arrived, Stake, Reental, Mogul and Prypco Mint all work this way, and every listing on Threeworld is one of these.

• What you hold: crowdfunding is often a loan or a project share, fractional is equity in a finished property • When you are paid: crowdfunding debt pays interest on a schedule and development equity pays at completion, fractional pays rent monthly or quarterly from day one • Choice: fractional lets you pick the exact building, crowdfunding funds often do not • Risk type: crowdfunding debt carries borrower default risk and development equity carries construction risk, fractional carries tenant, market and sponsor risk • Term: crowdfunding loans run 6 to 36 months, fractional properties are held 5 to 10 years with a secondary market on many platforms • Return profile: crowdfunding debt is a fixed, capped return, fractional is a variable yield plus a share of appreciation • Minimums: both start around $10 to $500, with syndication-style deals higher

Choose crowdfunding debt if you want a fixed, predictable return over a short term and are comfortable with the risk that a borrower defaults. Choose development equity only if you can wait years and accept that returns depend on a project you cannot see yet. Choose a fund if you want one decision and broad exposure. Choose fractional real estate if you want to own specific, income-producing property, want income to start now, and want the appreciation upside that a loan does not give you. Many investors hold a crowdfunding fund as the base and fractional properties as the deliberate picks. The marketplace lets you see the specific picks before you commit to any of them.