Whether it’s buying a new home or saving for retirement, fractional ownership allows individual investors to enjoy the benefits of the growing commercial real estate market to build their wealth and achieve their financial goals.

Owning a home is the dream of everyone around the world. Whoever does not have a house wants a house, and whoever has a house wants a bigger house, the desire for a house is like a vicious cycle that does not end. Besides being a status symbol, a large house brings happiness and comfort where family members can coexist while enjoying their own space. Often the main obstacle to switching to a larger home is a lack of funds. The most common strategy for overcoming this problem involves selling the existing home and financing the deficit with a home purchase loan.

But is this the right strategy? After all, loans will actually make you a few thousand poorer because of the interest that you will have to pay. Add to this various additional functions such as processing fees – and borrowers usually end up spending quite a bit of extra money to finance their property.

Is a home loan reasonable?

Let’s take an example. Suppose a new house costs Rs 1 crore. You decide to sell your existing home for Rs 65 lakh and take out a home loan for Rs 35,000 remaining so that you and your family can move to the new property.

Home loan rates typically range from 7 to 9% per annum. So, a loan of Rs 35 lakh for seven years at 7% interest would require you to pay Rs 52,824 as a recurring loan installment. In total, you will pay the bank Rs 44,37,216 or around Rs 44.40 thousand including interest of Rs 9,37,216 on the principal loan amount.

But what if we say, you can buy your dream home for Rs 1 crore through an investment rather than a loan, saving Rs 9.40 lakh in the process. Doesn’t this sound more interesting?

Fractional ownership is a good solution

Partial ownership of commercial real estate is a unique low-risk, high-return investment option that home buyers can use to finance their dream home. With this option, you can buy a piece of commercial real estate in the size of a ticket at an affordable cost of Rs 25 lakh, making commercial real estate investments more affordable for individuals.

Investors can earn guaranteed rental income of 8-10% per annum as well as a capital increase of 5-10% per annum, making it an excellent option to grow your wealth. With rents rising by 15% every three years and fixed lease periods of 5-7 years, fractional ownership combines stability with good returns to compete favorably with other asset classes in the market.

The best way to finance your dream home

Now, let’s see how you can finance a larger home with a partial real estate investment, thus avoiding paying interest on loans and processing fees, while earning additional income.

Suppose, instead of taking out a loan of Rs 35,000, you invest 25,000 of your savings in a commercial property through the fractional investment route. You can earn Rs 2 lakh annually at 8% rental yield with 15% growth every three years due to rent escalation.

In addition, your investment will increase by 5-10% annually due to the increase in capital. Assuming a conservative capital appreciation rate of 5% per annum, your investment will grow to Rs 35.17 lakh in seven years resulting in an increase of Rs 10.17 lakh. The rental income from your investment will add another Rs 14,000 to your kitty (Rs 2 lakh x 7 years, excluding rent escalation) bringing your initial net investment value to Rs 49.17 lakh in seven years.

This will give you a grand total of 1.14 crore for the purchase of your new home. The only sacrifice you will need to make is that you will have to put off the purchase for a few years.

Risks and safety

Of course, micro-investing is not without its risks. The risks associated with assumed capital appreciation and rental yield may be harmful to investors who have little understanding of the sector. It is also important to know the effect of factors such as location and vacancy rates on returns and valuation. Hence, investors should associate themselves with good micro investment platforms that are known for providing rigorous due diligence and advice.

Leading micro investment platforms only deal in pre-rented commercial properties which add an extra layer of security for retail investors. Every property is checked against multiple criteria such as the reputation of the originator, worthiness of the assets, location, creditworthiness of the tenant, internal rate of return, lease agreement, etc. The presence of these safety nets makes it one of the best options currently on the market that offers a unique combination of good returns and stability.

New investment option

Combining the advantages of proptech with extensive sourcing and rigorous scrutiny, fractional ownership platforms provide an easy way for individuals to invest in commercial real estate by ensuring the safety and transparency of their investments.

Whether it’s buying a new home or saving for retirement, fractional ownership allows individual investors to enjoy the benefits of the growing commercial real estate market to build their wealth and achieve their financial goals.

With safe cash flow, asset diversification, and appreciation potential, the fractional investment in commercial real estate is among the most attractive investments on the market today. Use this new age investment to save money while financing your dream home.

(By Shiv Parekh, founder of hBits, the fractional real estate platform)
Disclaimer: These are the personal opinions of the author.

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