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Is fractional ownership a good way to invest in real estate?
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Updated: January 05, 2024
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
While the cost of purchasing a second home or vacation home is out of reach for many people, fractional ownership is a way to enjoy the benefits of a real estate investment at a lower cost because you're splitting the purchase and maintenance costs with other people.
What is fractional ownership?
Fractional ownership allows individuals to buy a share of a home. For instance, if a home is listed on the real estate market at $600,000, and six equal shares of the home are for sale, each share would sell at a price of $100,000.
Sometimes referred to as a âdeeded trust,â fractional ownership gives each buyer the rights associated with owning property. This is comparable to a small-scale version of real estate crowdfunding, where a group of people shares the cost and benefit of owning a specific investment property.
Similar to how a traditional timeshare works, the owners share costs and access. Whereas a timeshare involves 25-50 people and limits access to one or two weeks a year, fractional ownership involves two to 12 owners with three to five weeks of access each year.
How fractional ownership works
With fractional ownership, each investor owns a portion (or fraction) of the property's title (or deed). As a fractional owner, you can make personal use of the property and earn income when itâs not used by other owners or rented out.
Typically, a specialized property management company oversees the property and manages the rental scheduling, maintenance and the accounting of the revenue and expenses. As a fractional owner, you schedule time through the management company when you want to use the home.
Another way to take advantage of fractional ownership is to purchase a share of a home, then rent it out. By doing this, you can use the rental income to pay for your share. Meanwhile, any profits can be used for future investment into your own residence.
Pros and cons of fractional ownership
Pros
- Limited number of owners: Whereas timeshare ownership is shared with up to 52 other owners, fractional ownership typically involves two to 12 partners.
- Equity: Fractional home shares offer true ownership interest. Your name is on the propertyâs legal title, and you share all the benefits of actual property ownership.
- Bequeath ownership to heirs: Fractional ownership is a real estate property asset so that you can bequeath your ownership share to your heirs as part of your estate.
- Control over property management: Owners have direct input into how the property is managed.
- Vacation flexibility: Typically, owners are not required to use all of their allotted time themselves. You can allow family members, friends or even employees to use some, or all, of your time.
- Appreciation potential: As an owner, you directly benefit from property price appreciation when you sell your ownership shares or the property is sold.
- Potential tax deductions normally afforded to real estate investors: The home is typically rented out when not used. Rental property investors can deduct maintenance expenses and annual depreciation on their itemized taxes. Check with your tax accountant to be sure you can benefit from deductions.
Cons
- Maintenance expenses might be high at times: You own a specific home, a real property asset that requires regular maintenance. Big-ticket items, such as the roof and furnace, have limited years of use before they need replacement. As an owner, you will share those costs when they arise.
- High initial outlay: Fractional owners have a higher initial financial commitment. You split the property acquisition cost among all fractional owners. If you're one of 10 partners for a $500,000 property, for example, your initial outlay will be $50,000 plus transaction fees.
- Partnership with people you may not know: You could have an unreasonable or difficult part-owner to deal with.
- Limited control on the sale of your shares: As a part-owner of a real estate property, you may not be able to sell your ownership share when and for the amount you want.
- Limited vacation spot choices: A timeshare arrangement allows the flexibility to go to different resorts managed by the timeshare company. But your options are limited to a specific vacation home with fractional ownership.
- Housing market risk: If the property appreciates, each ownerâs share equally appreciates. The reverse is also true. If the property is not adequately maintained and depreciates, the investment takes a hit. And each ownerâs portion is equally devalued.
Fractional ownership vs. timeshare ownership
Timeshares emerged in the 70s as an affordable and convenient alternative to booking a hotel for your annual vacation. Instead of spending hours planning your vacation and shelling out thousands for a weekâs stay at a pricey hotel, timeshare ownership privileges give you the keys to a guaranteed weekâs stay at a popular vacation resort each year.
Often, timeshare ownership allows you to choose different vacation destinations with your stay at a comparable resort covered under your timeshare contract. Typically, thereâs a one-time timeshare purchase cost, and after that, your timeshare ownership requires a monthly maintenance fee.
Whereas timeshares are essentially a vacation purchase that eliminates hotel expenses and guarantees one-week vacation availability at a resort, fractional homeownership is a shared investment in one specific property.
Youâve probably heard radio ads sponsored by companies who want to help you sell your unwanted timeshare. There are several reasons timeshares have lost some of their appeal for many vacationers. A few of the top timeshare property owner gripes include:
- Accommodations are basic quality
- Timeshare ownership (maintenance) fees tend to increase each year
- Thereâs really no secondary market to sell your timeshare if you no longer want it
Is fractional ownership a good investment strategy?
What defines a âgood investmentâ is highly personal. If you enjoy going back to the same vacation spot each year and are looking for an ownership share of that special property, fractional ownership could be a dream come true.
You lock in your future access at todayâs prices and benefit from any increases in long-term property value (appreciation). And you can earn passive income from weekly rentals when the property is not being used by yourself or the other owners.
As an investment property owner, you might benefit from rental property tax deductions like depreciation and property expense write-offs. If managed well, that could mean getting the benefits of rental property investment: monthly cash flow, annual tax deductions and potential property appreciation.
Real estate, particularly in popular vacation spots, generally appreciates. Owning shares of an asset that goes up in value over time and pays annual dividends (in rental income) is fundamentally an attractive investment.
However, itâs important to remember that real estate is not a liquid asset. It takes time and money to sell. So if youâre not planning to own long-term, the selling costs might eat up most of your property appreciation gains. And you might lose money if you need to sell when the housing market is in a slump.
More: Pros and cons of real estate investing
Alternative ways to invest in real estate
While timeshares are a perfect and longstanding example of fractional ownership, there are downsides. Today, there are a number of real estate crowdfunding companies that let you invest in real estate without much money. What's more, with these platforms, your real estate investment is passive and professionally-managed.
| Platform | Rating | Details | Review | Link |
|---|---|---|---|---|
| Fundrise | 4.5/5 | Non-accredited investors can take advantage of real estate investments with low minimum investment and low management fees. | Fundrise review | Get started with Fundrise |
| RealtyMogul | 4.5/5 | Offers a combination of REIT investment funds and direct real estate investments to a specific properties. | RealyMogul review | Get started with RealtyMogul |
| EquityMultiple | 4.3/5 | A solid crowdfunding choice for experienced real estate investors, as the company offers an impressive level of transparency on each deal. | EquityMultiple review | Get started with EquityMultiple |
| Roofstock | 4.3/5 | Non-accredited investors have the opportunity to invest in single-family rental real estate. | Roofstock review | Get started with Roofstock |
Bottom line on fractional ownership
- Fractional home ownership allows you to become a part-owner of a vacation property.
- This type of home ownership shares some similarities with a timeshare, except that there are fewer owners, and you have all the benefits and drawbacks that are associated with property ownership
- It's a great way to earn passive income and make money from appreciation, however, factors such as ongoing maintenance and difficult partners may make this a challenging investment
Fractional ownership is an investment strategy that provides an alternative to buying a timeshare. The biggest difference? Fractional home ownership gives you deeded property ownership rights and responsibilities.
There are similarities and essential differences between fractional home ownership and timeshare ownership. One is not necessarily better than the other. It depends on your preferred vacation style, priorities and financial situation. The main benefit is fractional home ownership offers a less costly way to truly own a vacation home.
