Whether you’re a beach lover or prefer a mountain view, you may have thought about buying a home where you like to take your annual vacation. While the cost of purchasing a second home is out of reach for most people, fractional ownership is a way to enjoy the benefits of a home-away-from-home while splitting the purchase and maintenance costs with other people.
Sometimes referred to as a “deeded trust,” fractional homeownership gives each buyer the rights associated with owning property. This is comparable to a small-scale version of crowdfunding, where a group of people shares the cost and benefit of owning a specific investment property.
Similar to a traditional timeshare, 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.
The Short Version
- 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
How Fractional Home Ownership Works
With fractional home 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 it’s 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.
Why Not Just Invest in 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 week’s stay at a pricey hotel, timeshare ownership privileges give you the keys to a guaranteed week’s 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, there’s a one-time timeshare purchase cost, and after that, your timeshare ownership requires a monthly maintenance fee.
You’ve 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
- There’s really no secondary market to sell your timeshare if you no longer want it
Read more >>> Why Buying a Timeshare Is a Bad Idea
Pros & Cons of Fractional Home Ownership
- 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 property’s 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.
- 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 owner’s share equally appreciates. The reverse is also true. If the property is not adequately maintained and depreciates, the investment takes a hit. And each owner’s portion is equally devalued.
Is Fractional Home Ownership a Good Investment?
What defines a “good investment” 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 today’s 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, it’s important to remember that real estate is not a liquid asset. It takes time and money to sell. So if you’re 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.
The Bottom Line
Fractional home 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.
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.
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.
- How to Invest in Real Estate With Little Money
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