Buying shares of a property owning company (fractional ownership) - Good opportunity or stupid idea?

Landlord Discussion Property Investment
1

A friend wants to sell his commercial property portfolio that he owns via a limited company.

It’s fully let on long leases to top tier tenants and he seems to have a reliable a management company looking after the property and its making a really decent return.

Instead of selling it conventionally, he’s creating 10 equal shares in the company and selling the shares. He calls it ‘fractional ownership’.

The most I could afford to buy is 1 share, so the other 9 shares would be sold to people I don’t know.

The management company would stay engaged during the sale, but the share holders can vote and replace them in the future. Disposing of the properties would be done in the same way, by majority vote.

But there’s no restriction in me selling my shares in the company at any time - if I can find a buyer.

I’m really tempted but I can’t decide if this is less risky or more risky than a conventional property investment.

On the positive side:

  • More tax efficient than buying a residential property directly where the first year growth is lost to stamp duty
  • I get instant revenue from my share of rental income and growth of my investment from increasing property value.
  • The commercial tenants are on longer leases and with the management company in place, I won’t have to be very hands on at all.
  • The risk is shared across multiple tenants and with up to 9 other investors.
  • Only way I’d afford to own really prime real estate like this.

On the negative side:

  • Can’t buy the shares with a mortgage so it will have to be cash.
  • No real control over any decisions that come up. (but I don’t have time really so maybe that’s a positive)
  • Selling my share, not as straight forward as selling a whole property.

This last one is the one I’m most worried about!

If everyone else thinks this fractional ownership is a lower risk, more tax efficient way to buy property and you would also be tempted like me, then I know I’ll be able to sell it in the future.

If everyone thinks its a stupid idea, never catch on, strangers owning shares in a property together etc. then I’d be worried about the future value of my investment.

So good opportunity or stupid idea?

2

I have commercial properties that I totally own. Good returns Why not buy a commercial property and rent it out. Tho commercial units freehold are like hens teeth, ,shops more readily available.

3

Thanks Colin,

Yes, I’m looking at commercial property outright as well. But this seems like a lower hassle, lower tax, lower risk way to get in to commercial. Also its really prime property and I couldn’t afford anything like this outright. But the downside could be in 10 years when if I decide to cash out.

Interested to know, would you be tempted to buy a ‘fraction’ of a property?

4

I do have a couple of properties I share with two different people but I have known them for 50 and 30 years. I would not buy with a stranger We own 50% each

5

Do a proper risk analysis and look at the options. Have you seen all the financials/figures? What type of commercial (office/pandemic affected or factory)? How have the tenants done with C19. Can you risk all this cash? Your gut feel is there for a reason. Why is he selling? Is there such a think as an easy money making deal? Does this investment have the flexibility to meet any life events you have coming up.

6

Thanks again Colin. That’s my worry too.

7

Thanks Lucinda. Great questions to evaluate the investment. I think of all of these, the lack of flexibility is the killer on this one.

I think I’m going to stick to what I know …

Thanks again