The idea of fractional ownership has been around for centuries, but it has only recently gained popularity in real estate.
There are many advantages to this arrangement, but there are also some potential drawbacks that you should be aware of before considering fractional real estate ownership.
This post takes a closer look at the concept and helps you decide if it’s right for you.
What Is Fractional Ownership Of Real Estate?
Fractional real estate investing is investing that allows you to own a piece of a property rather than the entire property. This investing has become increasingly popular in recent years as it allows investors to diversify their portfolios and enter the real estate market with less capital.
How Does Fractional Ownership Work?
In other words, multiple investors own property together; this can be done through a joint venture, an LLC, or a partnership. Each investor owns a percentage of the property and has a corresponding share of the profits (or losses) generated from the investment. This makes it a more affordable option for people who want to invest in real estate but don’t have much money to put down.
Fractional real estate ownership is also a popular option for vacation homes, as it allows multiple families to share the cost of the property.
How To Get Started With Investing In Fractional Real Estate
If you’re considering fractional real estate ownership, you should keep a few things in mind.
- First, you will need to decide how the property will be used. Will it be used as a vacation home, rental property, or both? This will help you determine the best ownership structure for your needs.
- Next, you will need to find a property that meets your criteria and is available for fractional ownership.
- After that, you’ll need to decide how many people will be involved in the ownership.
- Lastly, you will need to negotiate the terms of the fractional ownership agreement with the other owners. The agreement should outline the responsibilities of each owner, how the property will be managed, and how expenses will be divided.
The Different Types Of Fractional Ownership In Real Estate
There are a few different types of fractional ownership in real estate, and each has its benefits and drawbacks.
1 | Timeshare
The most common type of fractional ownership is known as a timeshare. Timeshare fractional ownership in real estate is a system where multiple individuals own a share in a property. Each share gives the owner the right to use the property for a certain time.
Multiple individuals share joint ownership of a vacation property, such as a condominium, villa, or resort. Timeshares are typically purchased as a weeklong unit, and owners typically have the right to use the property for a week(or more) each year. Timeshares can be a great way to enjoy a vacation property without having to shoulder the entire cost of ownership.
You should keep a few things in mind:
- First, be sure to do your research and choose a reputable timeshare company. There are many timeshare scams, so it’s important to be aware of the risks before committing to anything.
- Second, be realistic about your usage. If you only plan to use the property for a few weeks out of the year, it might not be worth the cost of purchasing a timeshare.
- Finally, remember that a timeshare is a long-term investment. If you’re not sure you’ll be able to commit to the same property for years to come, it’s probably not the right choice for you.
2 | Private Residence Club
A private residence club (PRC) is a type of fractional ownership in real estate. Under this ownership model, a group of individuals own a share of a property, such as a vacation home, and exclusively use it for a certain amount of time each year. PRCs are popular among people who want to own a second home but don’t want the hassle and expense of maintaining it full-time.
Unlike traditional timeshares, private residence clubs offer higher amenities and services and feature luxurious properties in prime locations. Private residence clubs are typically sold in 1/8th, 1/4th, or 1/2 interests, which give the owner access to the property for a certain number of days or weeks each year.
While private residence clubs can be a great way to own a vacation home, there are a few things to consider before purchasing.
- For one, private residence clubs are often located in desirable vacation destinations, so you’ll need to be prepared to pay a premium for your share.
- Additionally, it’s important to be aware of the restrictions of owning a fractional interest in a property. For example, you may only have access to the property for a certain number of weeks out of the year, and you may have to book your stay well in advance.
- Finally, read the fine print of your contract carefully so that you understand all of the rules and regulations associated with your membership.
3 | Destination Club and Vacation Club
This fractional ownership provides an alternative to traditional vacation ownership, such as timeshares. They typically require a higher initial investment than timeshares but offer more flexible usage options and a wider range of properties.
Destination and vacation clubs are fractional ownership in which members purchase the right to use a portfolio of properties. With destination and vacation clubs, memberships can be purchased that provide access to a network of properties worldwide. This type of ownership has become popular among those who travel frequently or have a second home.
There are a few key differences between destination clubs and vacation clubs.
- First, destination clubs generally require a larger upfront investment than vacation clubs.
- Second, destination clubs often offer a higher level of luxury and amenities than vacation clubs.
- Finally, destination clubs typically have longer-term contracts than vacation clubs.
4 | Condominium Hotels
Condominium hotels, also known as condo hotels or condotels, are a type of fractional ownership in real estate. Under this ownership model, buyers purchase a condo unit within a hotel-style development. The unit can be used for personal use, but it is also part of the hotel’s inventory and can be rented out to guests. The management runs the hotel and splits the profits with the condo owners.
While condo hotels are growing in popularity, there are some potential downsides to this type of ownership. For instance, because the unit is part of the hotel’s inventory, the owner may not have as much control over how it is managed and maintained. Additionally, the rental income from the unit may be subject to the hotel’s operating expenses and other fees.
Pros And Cons Of Fractional Ownership In Real Estate
Pros of Fractional Ownership
- It is more affordable than traditional ownership. One of the biggest advantages of fractional ownership is that it makes investing in real estate more affordable. When you purchase a property with multiple investors, you can spread the cost of the property over a larger number of people. This can help you to get into the market with a lower down payment and monthly payments.
- More diversification of risk. When you purchase a property outright, your investment is concentrated on one asset. This can be risky if the property does not perform as well as expected or if the local market declines. Fractional ownership spreads your investment over multiple properties, which can help to diversify your risk.
- It can provide a steadier income stream; many fractional ownership programs allow investors to share the property’s rental income. This can provide a steadier income stream than traditional real estate investing, which can be more volatile. It can also be a good way to generate income from a property without the hassle of being a landlord.
- You can get involved in high-end properties. Fractional ownership can allow you to invest in properties that might otherwise be out of reach. When you purchase a property with multiple other investors, you can pool your resources to purchase a more expensive or luxurious property than you could afford on your own.
Cons of Fractional Ownership
- One of the biggest disadvantages of fractional ownership is that it may not give you as much control over the property as sole ownership would. For example, if you own a 1/4 share of a property, you would only have a say in 25% of the decisions made about the property. If you disagree with the other owners about managing the property, this can be a problem.
- Another downside to fractional ownership is that it can be more difficult to sell your share of the property than to sell an entire property. This is because there are more potential buyers for an entire property than for a fraction of a property. If you need to sell your share quickly, you may have to accept a lower price than you would like.
The Difference Between Fractional Ownership and Timeshare
There are a number of key differences between fractional ownership and timeshare. It is especially important for investors as the rights and ownership of the property will vary.
Timeshare only grants the buyer an amount of time to use the building or apartment per year. Often, this is only one week as there is a high number of other owners. Depending on the amount of time each buyer desires, timeshare properties usually have between 26 and 52 owners.
On the other hand, fractional ownership of real estate is occupied by far fewer people. This means that each of them can use the property for multiple weeks a year. Often up to 8 weeks, depending on the investment volume. As a result, properties are easier to manage, have higher resale values, and don’t wear down as quickly. These buildings are also usually of higher quality and in better locations, but also cost significantly more.
From an investment point of view, fractional ownership offers better returns. In the end, it depends on the personal preferences, budget and goals with these kinds of properties.
Alternative to Fractional Ownership - REITs
If you are looking for an alternative to fractional ownership, then REITs or Real Estate Investment Trusts might be worth looking into.
It must be said that you will not be able to live in these properties, as they are a professionally managed fund. If you only want to invest in real estate, but do have not enough capital or don’t want to own an entire property by yourself, then REITs can be a good solution.
Take a look at our in-depth article on this topic to find out more and discover the many benefits of REITs.
Examples of Fractional Ownership Platforms
Before buying your first fractional ownership property, it is best to work together with a platform that has a track record of successful projects.
We identified two different companies that offer fractional ownership of holiday homes and apartments. The main differences between these platforms are the location and services they offer for the properties.
Vivla
Vivla is a fractional ownership company from Spain. They specialise in holiday homes in the local region, including mainland Spain, but also islands like Mallorca, Ibiza and Menorca.
It is possible to buy between 1 to 4 shares of a property. Each of these gives the buyer 6 weeks of access to the home per year, which means a maximum of 24 weeks.
In addition to the purchasing and selling service, Vivla decorates the homes, refurbishes them, conducts maintenance and cleans the property. They also offer extra services such as catering, airport transfers, restaurant bookings, and more. These come with an additional fee.
Pacaso
Another company that offers fractional ownership, is Pacaso. The business is based in California but has a large variety of properties and destinations. Most of the houses can be found in the USA, but also in the UK and Mexico.
Depending on your budget and preferences, you can own between 12.5% to 50% of a property. Pacaso manages the entire transaction process, including purchasing and selling. Additionally, they conduct maintenance and repairs at the property, which can be scheduled using their own app. This app will also be used to book the home.
When owning 12.5% of a property, owners will be able to stay for a total of 28 days in it.
Conclusion
Fractional ownership in real estate can be a great way to afford a luxurious property or vacation home. However, before purchasing, it is important to be aware of the potential drawbacks. Carefully weigh the pros and cons before deciding if fractional ownership is right for you.
If you want to learn more about commercial real estate, PropTech, smart buildings, and sustainability, feel free to take a look at out other articles.
To stay up-to-date, we would be very happy if you subscribe to our monthly newsletter. Just enter your e-mail address below. Thank you!
