Want to Invest in Real Estate with Friends and Family? Fractional Makes it Easy

How this Y Combinator startup uses embedded banking to power its property investment platform
Headshot of Daisy Lin
Daisy Lin
Head of Content
December 20, 2021
Fractional product screenshot
Fractional product screenshot

Investing in property is difficult. Stella Han and Carlos Treviño, who met as engineers at Affirm, would know: When the friends pooled resources to buy property in Mexico, they had to pay a lawyer $750 an hour to guide them through the convoluted process. 

That got them thinking: What if they could make things easier? Their answer: Co-founding property investing social platform Fractional.

Fractional facilitates co-investment in property among friends, family, and acquaintances. By embedding bank accounts and bringing together real estate, lending, and property management partners in one platform, the startup creates a seamless experience that’s convenient for investors of all levels of experience. 

“Our whole model is around true ownership, but just in a fractional sense with other partners. You own the house and you have full freedom and agency to collaborate with your other co-owners on making decisions and running that property,” said Han. 

With real estate values rising across the United States, the return on investment for home purchases is high — but so is the barrier to entry. Enabling friends and acquaintances to partner and invest together makes the market accessible to people who otherwise wouldn’t have the funds to afford to buy property or the financial profile to qualify for a sufficient loan. 

Since its late-2020 launch, Fractional has brought on 400 users to a test version of the app. That user base has gone on to invest in 95 properties. As Han and Treviño prepare to graduate from Y Combinator’s winter 2021 accelerator cohort, their company is poised to continue growing. Fractional recently raised $5.5 million at a $30 million valuation, from investors including CRV, Y Combinator, and Will Smith (yes, that Will Smith.)

Central to Fractional’s operations is the ability to immediately open bank accounts for users virtually. Without these accounts, there’s no organized way for users to pay expenses such as the mortgage or to accept rent payments from occupants. In order to process transactions, banking as a service (BaaS) provider Treasury Prime connected Fractional to Piermont Bank through its API software.  Piermont hosts the accounts, while Treasury Prime facilitates key services like automated clearing house (ACH) and wire transfers, and know your customer (KYC) identity verification. 

Turning something as complex as property investment into something streamlined for different groups of people with varying goals and preferences is no simple endeavor. Here’s how Fractional gets it done. 

Embedding bank accounts on the fly

To buy a property with friends or acquaintances, you generally need to first set up an LLC that will legally own the property. Once you’ve done that, you need to set up a business bank account for the LLC. 

Traditionally, setting up that bank account could take weeks, said Han. That slows down the whole process, holding partners back from purchasing a house or complex. Fractional is able to cut out the wait by helping customers rapidly open accounts from within the investing platform. The company can do this because it works with Treasury Prime and Piermont Bank to maintain a “for benefit of” or FBO account, which is a type of custodial bank account from which it can generate smaller sub-accounts for users. 

“Being able to create a bank account on the fly whenever a partnership is being formed is extremely critical,” said Han. 

This speed means Fractional is able to help its users better compete in their chosen markets. 

Access to accounts is embedded directly in the platform so users can view their account balance, records of bills paid from the account, and records of revenue distribution to co-owners. 

Putting together the moving pieces

Acquiring a property is just the beginning. Now the co-owning partners have to manage the property until they are ready to sell. That means renting it out and deciding whether or how to invest in improvements or remodeling. 

Fractional partners with property managers who integrate with their platform, making rental operations easier, though users are also free to hire their own property managers. Managers collect rent from tenants, then deposit it into the investment LLC bank account, minus expenses such as building maintenance and the property management fee. Bank account funds are used to pay the mortgage and insurance, then the remaining revenue is distributed to the property co-owners in proportion to their investment.

“We have a network of different partners, including real estate agents, property managers, and home insurers. The benefit of working with our network partners is that they are integrated into our platform, and in some cases, they offer discounts to our users,” said Han. “That said, Fractional values flexibility. If users want to manage the property themselves, or find their own property manager, for instance, they have the full freedom to do that as well, because they are the true owners of the property.” 

Moving at the speed of Y Combinator

Han and Treviño are in the Winter 2021 class of accelerator Y Combinator, which means they’ve built their complex business from the ground up in just roughly one year. The need to adhere to such a rapid timeline made speed a top consideration when Fractional was seeking its bank and BaaS partners. 

“Treasury prime was pretty confident about meeting our deadlines. They understood the whole pressure behind YC, and Demo Day coming up. They showed they could be flexible to push through a lot of those things for us. So that was the biggest value add for us in the early days,” said Han. 

Interested to learn more about whether embedded finance is right for your business? Read more about it here. Developers interested in using Treasury Prime’s tools can familiarize themselves with our offerings by visiting our Sandbox. To learn more about how Treasury Prime can help your bank or fintech grow through collaboration, get in touch with our team.

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