What is fractional ownership?
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Fractional ownership is a way to jointly own real estate. It allows multiple people to own a portion of the property without having to pony up the cash for the whole thing. Fractional ownership gives buyers significant cost savings but comes with some key disadvantages.
What is fractional ownership?
Fractional ownership is where several people share the ownership of a real estate asset such as a vacation home, a house or a condo. Unlike other forms of shared use that provide rights to possess or use but don’t bestow ownership, each person participating in fractional ownership actually owns a portion of the property.
Each owner has a direct share in the property, and the value of that share changes as the asset appreciates or depreciates. Furthermore, each fractional owner has a say in what happens to the asset and how it is used.
Fractional ownership can take several different forms, including:
- joint tenancy, which everyone involved equal interest in and rights to a property
- tenancy in common, which gives each owner a partial interest in the property
Fractional ownership is most often applied to real estate but it can be used to purchase many sorts of property, including:
- Yachts and boats
- Recreational vehicles
- Sports cars
Fractional ownership vs timeshare
Fractional ownership differs from a timeshare arrangement. A timeshare allows use of the asset for a defined period only, usually a week, and sometimes in certain years. Time-share owners have no direct say in how the asset is used, maintained or sold. They only own time to use the property — not the property itself.
In contrast, fractional owners share responsibility for the maintenance and upkeep of the asset, although it is common practice to contract these duties to a management company. And they do have a say in how it’s disposed of, as they own a piece of it. They can even leave their share to beneficiaries or sell it to someone else (depending on the exact form the fractional ownership takes).
In terms of vacation homes, depending on the size of their shares, they might also have a lot more time to use the property — typically for a period of up to 26 weeks.
Fractional ownership pros and cons
Advantages of fractional ownership
- Gives buyers access to a property they couldn’t otherwise afford.
- Spreads out maintenance responsibilities among multiple owners.
- Can build equity in the property if it goes up in value.
- Might get a portion of rental income when not using property.
Disadvantages of fractional ownership
- Fewer financing options: You need to find a lender that specializes in fractional ownership mortgages.
- Possible disagreements with other owners on management, maintenance, use, etc.
- High maintenance costs and fees depending on your ownership agreement.
- May be difficult to sell property or your stake in it.
Final word on fractional ownership
Fractional ownership is that it facilitates the group purchase of an expensive asset, permitting each owner access to and use of it, according to the size of their share. When property is purchased with fractional ownership, the title is split between the owners in proportion to their ownership.
This style of ownership allows you to access property that would otherwise be cost prohibitive while still having an investment stake in the property. By owning a portion of it you can benefit from potential rental income when it’s not in use or sell your stake at a profit if it goes up in value.
However, there can be communication difficulties with fellow owners, along with hassles from HOAs or municipal authorities who don’t like the idea of a shared home, with its transient occupants, in the ‘hood.