Is Fractional Home Ownership A Smart Investment For 2023?
Investing in real estate grants us the opportunity to grow massive wealth. However, traditional means of real estate investing just aren’t for everybody.
Down payments alone are already a huge barrier to entry. So, are there any real estate investment strategies that don’t require you to shell out big capital?
Well, yes! You can do this through investments such as REITs or ETFs. But another real estate investment is gaining popularity fast—Fractional Home Ownership.
What is Fractional Home Ownership?
Millennials are struggling to buy homes. According to statistics, only 38.5% of people aged 35 and below are homeowners. The alternative to owning a home? Fractional home ownership!
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It’s a method of buying a portion of a property with others investors. Each one gets a slice or a portion of the property. You often see this for holiday apartments, resorts, and vacation homes.
Fractional real estate ownership allows access to these properties for five weeks or more every year. Each owner has an equal part of the property and can have a say in how it’s managed.
As you can see, it has lots of similarities to timeshares. But it has several key differences. Here are some examples of the differences between fractional ownership vs timeshares:
- Timeshares are a way to purchase the right to use a vacation property for a specified time frame. There’s no true ownership or equity.
- Timeshares can have up to 52 owners. Fractional ownership properties generally have a maximum of 6 – 14 owners per unit.
- Upfront costs for timeshares are lower than fractional ownership. But, it depreciates faster with uncertain resale opportunities.
Types of Fractional Home Ownership
There are several types or categories of fractional home ownership. Some might fit better for your situation while others don’t. To help you with the research process, here are the most popular types of fractional home ownership you can encounter:
- Private Residential Clubs: PRCs can have 4-13 owners per home. This is also a type of equity ownership that isn’t unit-specific. This means an owner can use any unit, as long as it fits the right size and kind, during the allotted usage period.
- Quarter Shares: These are fractional ownership agreements with exactly four equal shares. Quarters shares are deeded and generally include single homes or condominiums.
- Deeded and Titled: These arrangements require participants to be listed on the legal property title. This can include properties such as single or multiple homes and multi-unit resorts.
- Condominiums: Condominiums share the exact definition of condotels and condo hotels. These are hotel properties partitioned into condo units. Each owner solely owns a specific unit.
- Destination and Vacation Clubs: These types of property include different homes in different locations. Owners can use any of the homes within the club. The properties can also be both equity and non-equity depending if the participants have ownership interests.
But both equity and non-equity clubs will provide owners with an exit strategy following a pre-set number of years of participation.
Fractional Home Ownership: Pros and Cons
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To help you figure out if fractional ownership is a good investment for you, we’ve listed down some key pros and cons:
Fractional Home Ownership Pros
One of the most sought-after benefits of fractional home ownership is its affordability. It also gives investors fewer risks, and the opportunity to invest in luxury properties affordably.
Here’s a more in-depth look at the benefits:
- Affordable: Fractional home ownership allows multiple investors to purchase the property. The large costs can be spread across the owners lowering capital costs and monthly payments.
- Risk Diversification: Buying a single property can be risky. Several issues can arise including market downfall, tenant issues, and maintenance problems. With fractional ownership, the risk is spread across multiple properties and investors, diversifying risks.
- Steady Income: Fractional ownership allows you to invest in real estate without being a full-time landlord. You can even get passive income from high-end properties.
- Luxury Properties: Fractional ownership allows investors to invest in high-end, luxury properties. Investors can pool together capital to fund the purchase of more luxurious properties or vacation homes that couldn’t be affordable for an individual.
Fractional Home Ownership Cons
Every investment has its own downsides and opportunity costs. One of the main ones you’d find in fractional home ownership is the lack of control and difficulty in selling shares.
- Being the sole owner of a property allows full control of how you want to manage it. This won’t be the case for fractional home ownership. Since you own just a fraction, decisions might come down to a vote, if there’s a disagreement, there could be issues.
- Selling your shares could also prove difficult as not a lot of investors would be willing to buy just a fraction of a property. If you need to sell your shares fast, you could find yourself selling them for a lower price than you’d like or even take a loss.
Key Takeaways
Fractional homeownership is a great way to invest in luxury real estate without a massive barrier to entry. It’s affordable, helps you diversify risks, and generates a steady income. To recap, here are some key details you might’ve missed:
- Fractional home ownership has a low barrier to entry. With Getaway, you can invest in luxury vacation properties for as low as $100.
- Properties typically have a maximum of 6 to 14 investors per unit.
- There are several types of fractional home ownerships including destination and vacation clubs, condominiums, and private residential clubs.
- Fractional home ownership shares can be difficult to sell.
- You don’t get full control of the property.