Invest 25 Lakhs and receive 45 Lakhs in five years24 Dec, 2021
Before we begin, let us assure you. This article is not about one of those financial schemes (or scams) that you keep reading about. This is about safely investing in a very legitimate and high-quality asset with assured returns over time.
What are we talking about?
We are talking about ‘Fractional Ownership’. For the uninitiated, it divides a very high-value tangible asset such as a premium commercial property into small ‘fractions’. These fractions become affordable for an individual investor who has comparatively lesser cash to invest upfront. While the ticket size of the investment and the associated risk is smaller, the potential for earning over five years or more is very high.
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Imagine a premium commercial real estate that is occupied by some of the most renowned companies. The ownership of this space would be beyond the grasp of an individual investor. Does this mean they shouldn’t own at least a part of it? That’s the exact lacunae that ‘Fractional Ownership’ intends to fill.
The mathematics behind Fractional Ownership
Let’s say you invest INR 25 Lakhs to purchase the lowest-denominated fraction of this property. The investment is made into a property that is professionally managed hence the rental income is assured from day one. Let us say you earn a nominal 8-10% per year on your investment as rental income. So, you will end up earning Rs. 2 Lakhs a year which will become Rs. 10 Lakhs at the end of five years at a nominal annual rental income of 8%.
Let us take a very safe assumption that the value of the property and correspondingly, your ‘fraction’ will appreciate at 5-10% per annum. The value of your fraction itself will end up at around Rs. 35.6 Lakhs if we consider an appreciation of 7.32%.
At the very conservative rate of return and value appreciation that we have considered above, your investment of Rs. 25 Lakhs will become more than Rs. 45 Lakhs (Rs. 45.6 Lakhs to be precise at an IRR of 13-20%) at the end of five years.
Would there be any risk?
While we must understand that no return comes without risk, it is wise to ensure steps to mitigate risks. That’s exactly what the ‘Fractional Ownership model incorporates and enables you to enjoy the following benefits:
- No scouting for the tenant, zero opportunity loss: You needn’t scout for a tenant and are unlikely to have an opportunity lost because a tenant vacates abruptly. The tenants are scouted by the firm managing or owning the premium real estate.
- Now, compare this to your own house if you wish to rent the same. Firstly, you must find a tenant. If your deal with the tenant gets delayed or doesn’t work out, you lose monthly income while your expense (EMIs towards the house) does not cease.
- Assured Rented Income: Your rented income is assured as the tenants normally have a lock-in period of 3-5 years and rental payments are secured as per the clauses in their leave and license agreements. The security deposits of up to 6 months provide an additional cushion in case a tenant makes an early or abrupt exit.
With your own house, the only assurance of a rented income is if you can find a tenant on time. The allied costs such as painting, repairs, etc. are also borne by you which eats into your rented income and actual returns.
- Additional Earnings from Ancillary Income: The common services such as cafeteria, concierge, technology support, etc. also yield income for the owners of the property. This may be passed on to the owners of the fractions over time.
- Such complementary earnings would never be possible when you rent your own house. Would it?
- Appreciation of rates for commercial property: The property may be valued higher within five years and the value of the fraction that you own could become much higher.
- While there is no denying that your own house may also see an increase in value over time, your EMIs, maintenance of your house, and the task of realizing the capital appreciation (if at all) by engaging a broker will reduce your real returns from your own home.
While we don’t intend to directly compare buying a home with ‘fractional ownership, we wanted to give you a perspective of how fruitful the idea of owning ‘fractions’ would be – not only in terms of monetary gains but also the hassle-free and low-risk nature of such earnings.
Are you willing to explore this financial instrument?
Take the plunge today. Invest in your first fraction right away.
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