Want to buy a bigger house? Here’s how fractional investment can help

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

Fractional ownership of commercial property is a unique low-risk, high-return investment option that home buyers can utilise to finance their dream home.

Owning a house is a dream of every individual across the globe. The one who does not have a house wants a house and the one who has a house wants a bigger one, the desire for a house is like an endless vicious cycle. Besides being a status symbol, a large house brings happiness and comfort as family members can coexist while enjoying their own space. The main obstacle in shifting to a bigger house is often the lack of funds. The most common strategy to get around this problem involves selling the existing house and financing the shortfall with a home loan.

But is that the right strategy? After all, loans will actually make you poorer by a few lakhs due to the interest you will have to pay. Add to this various add-ons like processing fees–and borrowers usually end up shelling out quite a bit of extra money for financing their property.

Does a home loan make sense?

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

Typically, home loan rates are 7-9% per annum. So, a loan of Rs 35 lakh for seven years at 7% interest would require you to pay Rs 52,824 as EMI. In aggregate, you would pay the bank Rs 44,37,216 or around Rs 44.40 lakh including an interest of Rs 9,37,216 on your principal loan amount.

But what if we said, you can buy your dream house at Rs 1 crore through an investment rather than a loan, saving Rs 9.40 lakh in the process. Wouldn’t that sound more interesting?

Fractional ownership is a good solution

Fractional ownership of commercial property is a unique low-risk, high-return investment option that home buyers can utilise to finance their dream home. With this option, you can purchase a piece of commercial real estate at an affordable ticket size of Rs 25 lakh, thus making commercial real estate investments affordable to individuals.

Investors can earn assured rental income of 8-10% per annum plus capital appreciation of 5-10% annually, making it an excellent option for growing your wealth. With rental escalation of 15% every three years and fixed lease tenures of 5-7 years, fractional ownership combines stability with good returns to compete favourably with other asset classes in the market.

The best way to finance your dream home

Now, let’s see how you can fund a bigger house through fractional property investment, and thus avoid paying interest on loan and processing fees, while earning additional income.

Let’s say that, instead of taking a loan of Rs 35 lakh, you invest Rs 25 lakh of your savings in a commercial property through the fractional investment route. You could earn Rs 2 lakh per year at 8% rental yield with a growth of 15% every three years due to rental escalation.

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

This will give you a total corpus of Rs 1.14 crore to buy your new house. The only sacrifice you will need to make is that you will have to postpone your purchase by a few years.

Risk and safety

Of course, fractional investment is not without its risks. The risks associated with assumed capital appreciation and rental yield could be detrimental to investors with a sparse understanding of the sector. It is also important to know the effect of factors like location and vacancy rates on returns and valuation. Hence, investors should associate themselves with good fractional investment platforms known for their advisory and rigorous due diligence.

Leading fractional investment platforms deal only in pre-leased commercial properties which add an extra layer of safety for retail investors. Each property is vetted on multiple parameters like builder reputation, asset-worthiness, location, tenant creditworthiness, IRR, lease agreement and so on. The existence of such safety nets makes it one of the best options currently in the market offering a unique combination of good returns and stability.

New-age investment option

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

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

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

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

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