+ how to invest in real estate with friends
Hey hey 👋, welcome back!
Before diving into the story this week, I would like to give a shout-out to my friends over at Unicorner.
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Personal finance, specifically investing, has been on my mind a lot now that I am officially an adult. Similar to many people of my age, I started investing by dabbling in some Robinhood stocks and index funds, and with the rise of cryptocurrency, I have also aped into some coins.
As of late, I’ve been especially interested in real estate. I love that it is generally uncorrelated with stocks or cryptos so it seems to be a good hedge for my investment portfolio. The second reason is social proof. Both of my parents love talking about real estate, which is one of the biggest contributors to wealth for many people around me.
My friends and I have played around with the concept of starting a real estate investing group, like pooling some money to buy a cash-flow generating property. However, most of our conversations don’t go anywhere because there is a lot of friction involved in the process, such as aligning on the investment thesis and deciding how to manage the property.
When I first heard about Fractional from my friend (big shout out to Anant!), I was instantly sold. Fractional helps people co-own investment properties with friends and other investors in the community. Not only does it reduce friction, but it is also a great platform for learning more about real estate investing in a relatively low-risk environment.
I put in a small amount of money in an investment property in Georgia (a deal listed on Fractional’s marketplace) within the first week. The whole process took about 1 hour in total - 30 mins of research and one 30 min call with the Fractional team.
As a big fan of the platform, I reached out to the CEO & co-founder, Stella Han, to learn more about the story of Fractional, so in good Consumer Startups fashion, let’s dissect the journey by going back to the very beginning.
(p.s.The story will be narrated from Stella’s perspective)
🌱 Stella’s upbringing
First venture - Common App for senior facilities
Originally from the Bay area, Stella has a natural propensity for building technology products. Her first entrepreneurial venture took place during her junior year in college. She wanted to create an easy way for the elderly to apply to senior facilities, a Common App for senior care. The idea came from her struggle helping her grandparents to apply to different senior facilities in the Bay - she had to fill out the same application over and over again which reminded her of the college application experience.
She teamed up with a friend to build the platform. They were gaining some momentum initially and even secured a partnership with 25 senior care facilities; however, it quickly dawned on them that this solution would be hard to scale. Senior facilities are extremely low-tech - everything is done with pen and paper. It would be incredibly difficult to get adoption, let alone convince senior facilities to pay for the software.
Even though the first rodeo didn’t work out, Stella learned the importance of founder-market fit. It was an uphill battle because they were both young college students in tech as opposed to someone that has spent a decade in the senior care industry.
Second college - learning at Affirm
Following college, Stella joined Affirm (the pioneer in the now popular “buy now, pay later” space) as a software engineer where she would meet her Fractional co-founder, Carlos Treviño.
It was the exact experience she needed. She learned many technical chops that would come in handy for building Fractional. For example, she learned about how to prevent fraud and assess risks when qualifying prospective investors. At the same time, Stella also found her passion for financial inclusion while working at Affirm, which aims to bring more transparency to consumer lending and lower the barrier for purchasing. Fractional also shares the same mission of empowering consumers by democratizing an asset class that is traditionally not readily available for most individuals.
✨Unique insight for Fractional
While working at Affirm, Stella and her co-worker Carlos would always chat about real estate investing. Both of their families are heavily involved in real estate. Stella’s parents flip houses in the Bay Area while Carlos’ family has a construction business in Mexico.
First project together
One day, Carlos told Stella about a potential real estate deal in Mexico. His family got exclusive access to land in Mexico. He wanted to bring Stella onboard. The thought was simple - lower the entry cost and share responsibility with a trusted partner to mitigate risks.
“It made a lot of sense to me as an investment and we trust each other since we've worked together before. We bought the land together as a partnership, and then we developed four retail storefronts on it. It’s been providing a good cash flow ever since. It was a very good investment.” -Stella
However, the initial process was not exactly smooth. It was their first time doing a partnership so they wanted to make sure they were fully aligned so they had to answer questions like:
How to make major decisions collectively?
How to operate the property?
How to resolve conflicts?
It was a long and expensive process because they had to hire a lawyer ($700/ hour) to figure out all the paperwork, but it was worth it for the long term. Once the framework is set, it would be much easier to scale and do more deals together in the future.
Sharing with friends
Naturally, Stella and Carlos began to share their story with other co-workers at Affirm and friends outside of work. Their story resonated with many people. It turned out that many of their coworkers and friends had been thinking about doing real estate deals with their friends but most of them didn’t end up pursuing anything due to two common pain points:
The process is too complicated (i.e. legal complications)
The logistics that came after the deal (dealing with property managers & financing) are annoying
After those conversations, Stella and Carlos quickly realized that they were stumbling onto something huge. Most people are interested in investing in real estate with a trusted group and the only things that are stopping them, such as legal contracts and property logistics, can be solved with technology.
🚗 Building Fractional
Step 1: collecting interest
To further validate the demand and the key value proposition, they built a landing page with a questionnaire. Initially, they considered two paths for Fractional:
Co-own to invest
Co-own to live together
The main objective of the questionnaire was to decide which path to go down. They sent the landing page to an anonymous social platform for professionals called Blind. To their surprise, 2k+ people filled out the questionnaire and indicated interest. They were also able to narrow down the value proposition because most people were interested in the co-own to invest concept, which has a more intentional goal behind it (to make money), and it is easier to manage than the alternative.
MVP: working with friends
Coincidentally, around the same time, a group of friends at Affirm were looking to purchase an investment property together in Atlanta. Stella and Carlos offered to help and took them on as the first group of customers.
Even though the group of friends already had a strong purchasing intention, the process was still challenging, mostly in the initial phase. Despite having the same intention to invest in real estate, people in the group had different views on investing. It was hard at the beginning to get everyone on the same page, specifically around the investment thesis and investment goal. Since the real estate market was (still is) super hot, they would have to move fast on a good deal.
This learning has impacted many product decisions. For example, they decided to create more features that would help investors (especially new investors) to reflect on their goals. The Fractional marketplace shows all the recent property listings with numbers on potential return profiles based on different factors such as holding period and investment amount. Investors are pushed to be self-reflective as they can see the impact of those variables on the potential return. Once investors understand what they are looking for, the alignment process would be a lot smoother when they start forming a group.
🔥Fractional Product and Current Trend
In plain words, Fractional uses its software platform to help investors with everything that is involved with investing and managing an investment property. It makes money by charging a one-time fee at deal closing and taking a cut from properties’ rental income.
The product today serves mainly two segments. The first segment is people that want to invest with a group of existing friends (either find a deal themselves or invest in a property listed on the marketplace). The second segment is mostly people that are looking to join a group and invest in a deal listed on the platform (I fall into this category).
One unique trend happening recently is that there are more and more real estate veterans joining the platform.
Many independent real estate investors often partner with their friends to invest in deals but it is often quite an ordeal for the leader of the deal to organize all the logistics so Fractional solves their pain point well. It allows those more seasoned players to outsource the logistics to Fractional, such as legal work and bookkeeping, so they can focus on finding good deals.
This trend is also creating a nice growth loop for the platform. As more seasoned investors join the platform, they will bring on more deals, which in turn attracts more rookie investors, who will gradually become more seasoned investors.
Current traction - Fractional has been operating in beta since earlier this year. To date, it has attracted more than 300 investors on the platform who are co-owning close to 80 investment properties.
🚀 Future of Fractional
Stella and Carlos started working on Fractional last year and decided to dive in full-time in December 2020 after seeing so much interest from everyone around them. They joined the Winter 2021 Y-Combinator cohort and recently raised a seed round from CRV, Goodwater Capital, Will Smith, Kevin Durant, and many more.
In the short term, the goal is to expand within the real estate market. They started with single-family homes and have slowly branched out into multi-family and small apartment complexes. It will soon expand to commercial deals due to demand from existing customers. In the long term, the Fractional team wants to build the modern infrastructure for fractional ownership. Real estate is a great entry point because the demand is very clear but the infrastructure they are building can certainly be applied for other assets such as yachts and jets that have high barriers to entry.
Can’t wait to follow their journey!
What do you all think about this space? Please reply to this email because I would love to hear from you!