Is fractional investing the same as doing a partial?

6 Replies

Ok first I’m trying to get my foot in the door in the NPN space. No complaints so far; it’s not an easy get rich thing so just plugging away. I don’t understand partials but I came across something called fractional investing (I believe the term was) This is a little different than a note. It’s actually a first lien position on the property based on the amount you put in. So for instance say 6 people go in to lending $600,000 to a developer (these are all non occupied investment properties in Texas) and all 6 put In $600,000, supposedly all six people will have their name as a first lien holder on the property. It’s a lower return than what’s expected from a NPN but much less risk. The one I’m looking at is a development of a two story commercial retail center with a LTV of 45%. All borrowers must pass a criminal background check and personally guarantee the loan. Further should they not fulfill there obligation it’s Texas so foreclosure is fast. Exit strategy is expected payoff or refinance in 9-12 months. Reason I’m doing this is while I work my way through building my NPN business I don’t want to leave cash sitting in the bank not making money. ROI is expected to be between 8-10%. Sure not some of the much higher numbers that are available in the NPN world but better than what I’m getting now by far WHILE I continue to work on NPN as stated above. Just curious if this is similar to doing a partial? Thanks for any help.

OK that's easy.

think of fractional investing in Notes just as you would tenants in common when you own the property.

if you and your buddy and another buddy BUY a piece of property and you each put in 1/3 .. you would then be tenants in common as to one third ownership on the deed  Correct ???  

Well same thing as a lender..  the the Vesting for the Beneficial interest of the mortgage or Deed of trust instead of one entity .. it spells out all six of you as to 1/6th interests and each of you can have separate vesting's.

so it can be your Robert IRA as to 1/6 Jay's IRA as to 1/6 etc etc we are in essence tenants in common in the beneficial interest in the mortgage or Trust Deed or Deed to secure debt if in GA.

This was and is highly common in CA were your loans are so big.. I was doing fractional in the 80s in Oakland and the HML i mentored with did them for as long as I can remember and he started in the early 50s.

Now some states its not allowed.. Like here in Oregon its illegal to fictionalize  this state considers it a security and you need a securities document to do it.. I don't know about Texas probably OK but worth asking.

Partial is just buying a certain amount of the cash flow...  say you want to buy 20 payments only thats what a partial is .. some will tell you thats a security others will say NO.. myself I don't do them.. but i would check in the state I was considering doing it in to double check your not running afoul of securities laws those are quite serious if violated.

One thing you want to do when you do a fictionalize is to get a handle on what happens in a default.. IE can you up front designate ONE person to sign all docs .. some issues we ran into in CA.. was investors not all agreeing to foreclose and so the loans would sit in limbo until they worked it out.. nightmare really.. so get that settled up front..

Originally posted by @Jay Hinrichs :

One thing you want to do when you do a fictionalize is to get a handle on what happens in a default.. IE can you up front designate ONE person to sign all docs .. some issues we ran into in CA.. was investors not all agreeing to foreclose and so the loans would sit in limbo until they worked it out.. nightmare really.. so get that settled up front..

That's why I would rather form a LLC rather than a fractionalized DOT so that there is one controlling interest managing the assets and operations. As long as the other members agree, it makes life much simpler.

Excellent responses Jay!

@Bob Malecki in my Hardmoney days in the 80s LLC were not invented then LOL.. so it was all fractionalize.

since we were the brokers we had pretty good control.. and in a Default Jack ( Mr. Langer) normally just bought everyone out.. but on occasion when the loans were too big .. we did have some bru ha ha s over foreclosing and then get a hold out and it put a monkey wrench into the process until we could buy their interest out or get them to cooperate.. this can be mitigated with an agreement up front..  Also you can go to the CA BRE they have a nice disclosure document right on line for fractionionalized Transactions..

Great answers. Thanks for the input!!!

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