Article | 9 min read
Published | May 11, 2022
Imagine a pizza. Cheesy, delicious, filling pizza. Mmmm. Maybe you want to eat the whole thing (we wouldn’t blame you), but it’s nice to have the option of taking just a slice. Sometimes having all of a good thing might be too much, so you just want a little bit. Investment communities everywhere use this very same concept: fractionalized investing (it wouldn’t be finance if there wasn’t a fancy term for it).
With the growth of cryptocurrencies over the last few years, more and more people are hearing about fractionalized investment. In reality, the idea has been around for a long time. Here at Willow, we take the concept behind fractionalized investing and apply it to real estate. Let’s break down what all that means.
First, let’s break down some other places where fractionalized investing happens. One place you’ll find it is in company stocks. Since we’re not all multi-billionaires, buying a whole company is really hard to do. Companies need money to grow, so instead of asking one person to buy it all, they divide ownership into a bunch of different little pieces called stocks. When you buy a stock, you’re buying a tiny portion (or slice) of a much larger company, usually because you think the company will be worth more in the future than it is today. The company wins because it has investors to help them grow, and you win because you own a piece of that growth.
In the stock market, the stocks can be split even further. If a stock price gets too high, or too inaccessible to a large amount of investors, the stock will “split.” Let’s say a company has 10 stocks that trade at $100 a piece. The company can choose to split each stock into two even smaller stocks, so that they now have 20 stocks at $50 a piece. All of the investors have the same total investment, but in smaller slices.
It’s like if you had a 16-inch pizza—you can cut it into eight slices, or go party-style and cut it into 24 squares. You can have as many slices as you want, and some are easier to digest than others, but it’s the same original pizza no matter how you slice it. This is a common tactic companies will use as their share prices grow; through fractionalization, they can make sure that as many people who are interested and able to own a piece of the company can.
Companies often use DRIPs, or dividend re-investment plans, to further break down their stocks into accessible pieces. When a company pays a dividend, it gives everyone who owns a stock a share of their profits without needing to sell the stock itself. The company can also then incentivize investors to put that profit back into the company by giving those investors a discount on more stock. Think of it like a rewards program, but with your portfolio. They want you to continue to return as a valued customer, so here’s a shiny discount!
With technology creating even more opportunities for investors, we also see fractionalized investing in tools like exchange traded funds (or ETFs) and mutual funds. Imagine—yes, you guessed it—a pizza: Let’s say you like more than just one topping on your pizza. You might pay the restaurant to let you have more variety on one pie. That’s what ETFs and mutual funds do. With these tools, you’re essentially pooling your money with other investors to add more variety to your portfolio. Why do this? A single share of Amazon trades for more than $3,000 USD. That’s an expensive, tiny slice! And it’s a lot of money for just one company. One of the cardinal rules of investing is to stay diversified—in other words, “don’t put your eggs in one basket.” ETFs and mutual funds allow you to pool your money, buy small slices of lots of companies (instead of just that one slice) with other investors, and benefit from diversification. Now if one company doesn’t do well or even goes out of business, you don’t lose your shirt—or appetite for investing.
Technology has taken this one step further. Some platforms let you buy slices of a company directly. Now, if you want to buy Amazon but don’t quite have $3,000 USD, no problem. You can decide how many dollars you want to pour into the stock itself. Buy a little, grow your money, and come back for more later.
Now, here’s where fractionalized investing exists in our money system. Currency by its nature is fractional—it’s why we can pay in cents instead of just full dollars. But fiat currency, or what most people consider “regular” currency, is often controlled by people in power. These people can choose to add more and more money to a system—literally just printing money when governments need it.
Ever heard your grandparents talk about how they could buy a carton of milk (or a house!) for practically nothing? That’s the impact of what the finance world calls inflation, and it happens to currency all the time. Inflation is when you have $10, but the amount of fiat currency is made so rapidly that your $10 is really worth $1. Your money becomes worth less over time, but you don’t actually see the decline in your bank account itself. Instead, you feel it in line at the grocery store.
This is one of the reasons cryptocurrencies began—to avoid inflation and take power away from governments. Being secure on how much currency was out there can help protect people against inflation. One of the primary pillars of Bitcoin is that there have only ever been—and will only ever be—21 million Bitcoins. But this set amount is fractionalized into smaller and smaller pieces as the value grows, allowing more investors to participate in the currency.
We’ve now seen how fractionalized investing works in other arenas. How does it apply to what we do at Willow? Because the term “fractionalization” is thrown around a lot, we wanted to make things extra clear for our clients. Instead of calling it “fractional real estate,” we created the category of PropSharing. It’s simple, clean, accessible, and digestible: We’ve broken down our properties into 100,000 units. Every unit is exactly 1/100,000th of a property. We’re not going to dilute the value of your unit, and we’re not adding more, so you feel confident in how much you own.
This is our way of bringing one of the oldest tools in finance—buying and selling shares of a company on the stock market —to real estate. An asset that makes sense on paper, in buildings you can physically see, where you get paid actual rent. So, what are you waiting for? Grab a slice!