Facebook pixel Fractional Real Estate Investments, the Double-Edged Sword for Millenials by Dajana Buzo - Surf Report | Pepperdine Caruso School of Law Skip to main content
Pepperdine | Caruso School of Law

Fractional Real Estate Investments, the Double-Edged Sword for Millenials by Dajana Buzo

Fractional Real Estate Investments, the Double-Edged Sword for Millennials

by Dajana Buzo

A new era of real estate investments is emerging through new companies offering fractional real estate investment opportunities. The housing market soared in 2022. In Los Angeles, more buyers are looking to buy a home than the number of homes available. Further, income growth is seriously lagging behind home price growth. In 2019, an 8.83 price to income ratio existed in Los Angeles, well above a healthy housing market average of 2.6. What does this mean for millennials looking to buy their first home?

As a result of the factors above, millennials are not buying homes because they cannot afford to do so. New companies that encourage fractional real estate investments are targeting individuals that fall within this criterion. Fractional real estate investments include various business models practiced by different companies arising. A major player in this field is Arrived Homes, backed by well-known investors such as Jeff Bezos and maintaining properties already funded worth over $51 million.

Arrived allows individuals to invest as little as $100 in their real estate of choice to acquire fractional ownership respective of the shares purchased. This business model closely resembles a timeshare concept. However, it serves a purpose of providing passive income generated through rental payments and tax advantages according to an investor’s fractional ownership rather than the use of real estate for a specified period of time as applicable with timeshares. Although timeshares and fractional real estate investments are similar, the latter allows for actual ownership of real estate in an affordable way. Further, with fractional ownership, investors purchase equity in real estate, not purely access to it. Arrived creates Limited Liability Companies or Limited Liability Partnerships that own the real estate and investors receive a deed for their respective shares of the real estate.

Millennials struggling to find affordable housing are given a chance to begin accumulating wealth by investing in a portion of a real estate when unable to afford it alone through fractional ownership. However, this may serve as a double-edged sword. The housing market will undoubtedly be affected as fractional real estate investments gain popularity. Less houses will be available to purchase for first time homeowners as more real estate is utilized for investment purposes, leading to increasingly higher prices and a high demand for such housing. We recognized similar trends as a result of an increase in short-term rentals such as AirBnBs that are contributing to the housing shortage. While it may appear attractive to own a share of real estate, this may further delay an owner’s ability to invest in their own property. Further, housing serving as the primary residency for owners will continue to decrease as it becomes more difficult and expensive to afford an individually owned home.

Fractional real estate investment may work properly within the real estate market without causing negative externalities for commercial properties that get rented out. However, growth of fractional ownership of houses and vacation properties will adversely affect the housing market due to housing shortages. Thus, it will continue to aggravate affordability issues for millennials attempting to purchase their first home.