What is Fractional Ownership in Real Estate?

Fractional ownership is a collaborative investment strategy that has gained prominence in the realm of high-value assets such as luxury yachts and upscale vacation properties.

In this innovative arrangement, multiple parties come together to share the expenses associated with owning and maintaining these sought-after assets.

Each investor’s contribution translates into specific ownership rights and entitlements to the asset, forming the foundation of a shared ownership structure.

Consider the scenario of investing in fractional ownership of a holiday home. In this case, your investment grants you the right to utilize the property for a predetermined number of days or weeks annually.

This unique approach enables individuals to relish the advantages of owning premium assets without shouldering the entire financial burden independently.

This post will serve as a comprehensive guide to fractional ownership in real estate, providing insights into its workings, exploring the potential advantages and disadvantages, and addressing frequently asked questions.

Whether you’re intrigued by the prospect of shared ownership or considering diversifying your real estate portfolio, understanding the nuances of fractional ownership is essential for making informed investment decisions.

What is Fractional Ownership in Real Estate?

In Real Estate, Fractional Ownership is a model where multiple investors purchase shares of a high-value property, effectively becoming co-owners. Each investor owns a percentage of the property, allowing them to share in potential rental income, property appreciation, and usage rights (in some cases).

While fractional ownership is commonly associated with real estate, particularly vacation homes, its application extends to various assets such as art, stocks, and fashion items.

Example: Vacation Home

• A luxurious vacation home is valued at $1 million.
• A fractional ownership company divides the property into eight shares, each costing $125,000.
• An investor purchases one share. They now own 1/8th of the vacation home.
• The property management company handles rentals, maintenance, and scheduling.
• The investor is entitled to:
  • A proportionate share of the rental income (if the property is rented out).
  • Potential appreciation in the home’s value over time.
  • The right to use the home for a designated number of weeks per year (depending on the agreement).

Moreover, fractional owners collectively share usage rights, income, and access to the shared property based on their ownership percentage.

This proportional sharing extends to the costs associated with maintaining and operating the property, ensuring a fair distribution of financial responsibilities.

One of the notable advantages of fractional ownership is its ability to enable individuals to buy and own high-value properties or assets without bearing the entire financial burden alone.

The concept revolves around all owners having divided percentage shares of a specific item or property.

Notably, while families may opt for shared ownership, fractional property owners can be unrelated individuals who come together for the mutual benefits of shared investment and access to premium assets.

This collaborative and flexible ownership model provides a compelling alternative for those seeking to enjoy the perks of ownership without the sole financial commitment.

Types of Fractional Ownership

There are two main types of Fractional Ownership Structures:

• An Entity, like an LLC
• Tenancy in Common (TIC)

Fractional Ownership through an Entity

Some properties split ownership by using a structural entity like an LLC (Limited Liability Company) or LLP (Limited Liability Partnership). This means that a separate legal entity defines the ownership.  

Tenancy in Common

Tenancy in Common (TIC) means each tenant holds an individual deed for a fraction or percentage of a commercial or residential property.

However, no one person or company is in charge. With a TIC, individuals can own different percentages of the property but share it equally. Some TIC agreements are self-managed.

Fractional Ownership vs. Timeshares

Fractional Ownership differs from timeshares because you own a portion of the property with fractional ownership.

For most timeshares, you only own time to use the property — this is called Interval Ownership. 

Timeshares may be shared by as many as 52 owners (one person or group for every week of the year) while fractionally owned properties can have as few as two owners. 

Why is fractional ownership gaining popularity?

Fractional ownership is gaining popularity for several key reasons:

• Lower Cost of Entry: It breaks down the financial barrier to owning high-value real estate assets, especially for individual investors.
• Diversification: Investors can spread their investment across multiple properties, diversifying their real estate portfolios.
• Reduced Hassle: Fractional ownership often includes professional management, which handles maintenance, rentals, and logistics for the investors.
• Potential for Returns: Investors can receive rental income and benefit from the property’s potential appreciation.
• Access to Luxury: It makes luxury properties (vacation homes, commercial spaces) accessible to a wider range of investors.

How to Invest in Fractional Ownership

• Find Platforms: Search for reputable fractional ownership platforms.
• Choose Property: Browse properties on the platform. Pick a property type (vacation home, rental, commercial) that fits your goals.
• Buy Shares: Decide how much to invest. Purchase the corresponding number of shares.
• Managed Investment: The platform handles maintenance, rentals (if applicable), and income distribution.

Fractional Ownership Advantages

There are several advantages to owning a property through fractional ownership.

Expanded opportunity to Own

Fractional investments allow you to own a portion of one or more properties — usually a resort condo or vacation home — in prime locales that might otherwise be beyond your budget.

With multiple owners sharing the costs, you can enjoy all the amenities of a high-end, resort-like property without breaking the bank. 

Deeded Ownership

Unlike a timeshare, fractional ownership gives you a deed to a fraction of the property itself (sometimes called a fractional interest).

This means that the value of your share in the property increases or decreases in line with the property’s real estate value. Any increase in value is divided equally and becomes gained equity for all fractional owners.

Usage rights

Unlike short-term vacation rentals, fractional ownership means you own actual property, giving you the right to use the fractional ownership vacation home according to your share.

For example, if you own one-fourth of a share in a property, you hold the right to use the property one-fourth — or three months — of the year. You can enjoy the home to the fullest extent of your share in the fractional ownership agreement.

Shared upkeep and maintenance Costs

Using the fractional ownership model, you’re also responsible for only a fraction of the upkeep and maintenance of the property.

This includes the cost of taxes, HOA fees, repair bills, landscaping, utilities, property management companies and other expenses associated with shared home ownership. 

Lower upkeep and maintenance burden

Most fractional ownership agreements include provisions for long-term property management, with owners deciding how to handle any issues.

Maintenance of shared ownership properties typically falls to a third-party management company.

If the property you share is recognized as a tenancy in common, the owners might take a more casual approach and assign property management tasks to individuals in the group. 

When you have fractional vacation home ownership through an entity, it will include preventative and routine maintenance, cleaning and property management in its ownership costs. 

Potential rental Income

A fractionally owned property can be rented out as a long- or short-term rental if the ownership agreement (and location regulations) allows it.

Depending on the terms of the agreement, all owners may earn a share in the proceeds of rental income. 

Fractional Ownership Cons

Though fractional ownership has its advantages, there are a few drawbacks to consider as well.

Fewer financing options

Fewer banks provide mortgages for those looking to buy properties fractionally. You may need to shop around or consider other ways to finance your fractional ownership property, like special second home down payment options. 

Less flexibility and freedom

All decisions about maintenance, repairs and decor must go through all ownership partners, which can be a hassle.

If you want to sell a fractional property, the other fractional owners must approve the sale, depending on your agreement. 

Some fractional ownership clubs also require you to maintain an agreement with the club or property management company associated with the home, with no option for self-management or management outside the company. 

Limited travel opportunities

While it’s not unheard of to own shares in multiple fractional ownership properties in different locations, investing in fractional ownership also means investing in the location you’re going to revisit.

Of course, you can still vacation elsewhere, but it’s something to factor into your travel plans and budget. 

An Alternative to Fractional Ownership

Where fractional ownership falls short, Pacaso steps up. Pacaso’s professionally managed LLC co-ownership model gives you all the perks and lower co-ownership costs with key differences that set it apart from fractional ownership resort clubs. 

Unlike fractional ownership resorts, Pacaso offers LLC co-ownership of luxurious vacation homes in choice destinations.

Buyers decide how much home they want to own, from one-eighth to one-half of a property.

Pacaso handles all maintenance and management, offers easy and equitable scheduling on the Pacaso app, and features a streamlined resale process in our co-ownership marketplace.