Want to own a vacation home but don’t have the money to pay the full amount? Don’t give up – you can still enter into fractional ownership, an investment strategy that lets you own a property for a fraction of the typical cost.
What Is Fractional Ownership?
Fractional ownership is when multiple people split the ownership of a particular property. In other words, fractional ownership is co-ownership. Fractional ownership is often seen in luxury properties (e.g. condominiums and resort communities) that may be too expensive for one person to buy themselves.
The parties involved (typically 4 to 12) own a percentage (or as the name suggests, a fraction) of the property and proportionally split the operational costs among themselves. And since the costs are split, so is the profit (if the property is meant to be an investment and is thereby rented out).
It’s worth mentioning that the amount of time a co-owner can spend on the property, as well as their level of involvement, may be determined by their fractional investment. Basically, their benefits are proportionate to their contribution.
Example: You live in California but you want to buy a vacation home so you can spend your summers in Florida. Unfortunately, you don’t have $500,000 to buy your dream holiday home. But you do have $100,000 to become a fractional owner of a home that four other people want to buy. So, you pool your money with the group to purchase the property. You then hire a luxury property management company to manage its day-to-day maintenance and agree on when each party can use the property.
Vacation Homes: Fractional Ownership vs. Timeshare
A common misconception is that fractional ownership is the same as a timeshare, however, they’re two distinct concepts. In a timeshare, you only pay for the time you intend to spend on the property. The property isn’t owned by you and other people, but by a corporation. On the other hand, in fractional ownership, you actually own part of the property. Furthermore, timeshares have more people involved (typically 20 to 50 parties).
In fractional ownership, you are a co-owner. That means your property has the potential to provide you with a rental income. You’ll also have a cut of the profits if the property increases in value over time. While some timeshares do allow people to own a percentage of the property, in general, you’ll only get usage rights.
What Are the Benefits of Fractional Ownership For Vacation Homes?
People become fractional owners for two main reasons, namely:
To Own an Investment Property
Real estate investments are real money-makers. The downside is that properties come with a steep purchase price. While you can get a mortgage, it’s worth mentioning that there’s no guarantee of approval. Fractional ownership is the “shortcut” as it allows you to buy properties that would otherwise be out of your price range. In this arrangement, you and your co-owners split the purchase price and costs, as well as the profit (in the form of rental income). Keep in mind that you may have to hire a luxury property management company, as you and your co-owners likely live far from the vacation home.
To Have a Vacation Home
Another reason why someone would want to become a fractional owner is that they want a holiday home. The goal isn’t always to make money (although you and your co-owners can agree to rent it out for a couple of months), but to use the property for personal purposes. For example, when you own a fraction of a luxury villa, you will have access to it for a predetermined time every year. How you can use will depend on the rules and regulations that you and your co-owners will create.
Typically, a third-party management company is responsible for maintaining a fractionally owned holiday home.
Why Fractionally Own a Vacation Home?
If you’re wondering why fractional ownership is a wiser option as opposed to sole ownership, ask yourself: why spend the money to maintain something you only use for a few months a year? Why not split the costs with other people who also want a vacation home? Below, we’ve broken down the benefits of owning only a fraction of a vacation home:
#1 Low Barrier to Entry
Purchasing only a percentage of a property means paying less than the full price. You’ll no longer need to prepare a sizable down payment – instead, you can split the cost with your co-owners. If you get enough people on board, you may be able to pay cash upfront and avoid having to get a mortgage. As a result, you’ll be able to benefit from the rewards of ownership at a more “budget-friendly” price tag.
#2 Reduced Operational Costs
Owning real estate is expensive. It comes with a long list of expenses including maintenance costs, repair costs, taxes, property management fees, and more. One of the best benefits of fractional ownership is being able to divide maintenance costs among yourselves. Rather than paying for the full price of repairs, you and your co-owners can pool your money. That way, you’ll pay less than what you would have to spend if you owned the whole home.
#3 Shared Responsibility
Sharing ownership of a property with other investors eases the strain, especially if you’re new to real estate investing. You won’t be alone because you can consult your co-owners. However, this can be both a good and bad thing. In some cases, decision-making takes longer because of the number of owners involved. Co-owners won’t always see eye-to-eye when it comes to property management. That’s why it helps to hire an impartial property management company.
Hire a Luxury Property Management Company for Your Vacation Home
If you decide to own a fraction of a vacation home, know that a property management company can make your life a lot easier. At Luxury Property Care, we’ve had years of experience managing fractionally owned properties in South Florida. We can guarantee that your vacation home will be managed and maintained, and that we’ll consider every owner’s preferences as we prepare our property management plan.
Call (561) 944 – 2992 or fill out our contact form to learn more about our property management services for fractionally owned vacation properties.
