Fractional Real Estate Investing 101: No Down Payment Needed
Fractional ownership is rapidly growing in popularity across the U.S. but relatively few people have even heard of it, let alone how they can get involved. Here we explore everything fractional ownership, including why it would be a good investment option.
What is fractional real estate investing?
Fractional real estate investing is an alternative investment method related to property ownership where you own a small part, or fraction, of a whole property. This means that your share of the purchase price and ongoing maintenance are considerably smaller than if you were to purchase the property as a whole. You receive your own title deeds, you actually own a portion of the property and therefore you can choose what you do in the future with your share. That means that if you decide to sell your portion for a profit, it’s absolutely in your power. Same as if you want to leave your fraction to the beneficiaries of your will.
How does fractional ownership work?
Fractional ownership relies on an agreement between all parties involved in the property. It means that all costs are shared between all home co-owners, but also that the benefits are shared too. That could mean partial use of the property, increased equity in the property, and rental/sale profits. The majority of the time the owners committee selects a management company to deal with the day-to-day running of the property. The management company will do everything from maintenance to bookings and even collect rental payments. They will then take their fee, and distribute the rental profits.
Many people select a single property to become a fractional owner of, but there are also fractional ownership clubs where you’ll not just have access to a single property but many across a network. This allows you to visit various establishments across the whole country.
Everything related to fractional ownership is proportional. That means that if you only own 5% of the property, you’ll only have access to the property over 5% of the time (if it’s acting as a vacation rental) or you’ll receive 5% of the rental/sale profits. A higher percentage of ownership means more time and more profits.
Why Fractional Ownership is a Good Investment
There are certainly some attractive reasons to invest in fractional ownership. It certainly appeals to almost everyone that is keen to invest in property but doesn’t have the larger amounts of capital required to go into it alone. And that’s the first reason why fractional ownership is a good investment:
Costs Are Lower
Sadly, few of us are able to look at the house we’ve dreamt of and make the decision to buy it. It can be disheartening when our budgets don’t make our aspirations. Fractional ownership affords you the chance to own a small part of a dream home, typically in an amazing area. You won’t have access the whole time but you’ll have it some of the time. That’s better than none of the time! Plus you’ll likely financially benefit from it.
The initial costs related to fractional ownership are considerably lower too. Rather than having to save tens (sometimes hundreds) of thousands of dollars as a downpayment, you simply pay a smaller monthly or annual fee.
The Property Is Maintained
If your fractional ownership is based on vacation use, you’ll only have to maintain it for a small part of the year. Consider that if you owned a vacation home entirely yourself, realistically you’ll only see it maybe 4 weeks a year. That leaves 48 weeks without regular maintenance and care. Sharing the home with others means that you get a well cared for property that’s a pleasure to visit. If instead, you choose to rent out the property, it will be regularly maintained by property management agents.
The Responsibility Is Shared
Let’s say that something dramatic happens and the roof of the property needs repairing. This could be a monumental undertaking as a sole owner and could cause you financial issues. When you only own a fraction of the property it means that you’re also sharing the financial burden of any maintenance issues. Furthermore, you’ll share the mental burden too. A problem shared is a problem halved after all.
It’s Almost Entirely Passive
Yes, there will be times when you’ll have to dedicate time and energy to paperwork or make group decisions, but these times will be few and far between. The remainder of the time you’ll receive a monthly or annual payment as a profit from your investment.
Fractional Ownership vs Timeshares
Timeshares were the incredibly popular part-ownership option popularized during the 1970s and 1980s. They are often seen as one and the same with fractional ownership, but there is an important difference. The key difference is what your investment gets you. With timeshares, you’re paying for access to one or multiple properties at particular times during your lease. Fractional ownership on the other hand gives you an actual part of the physical property. You actually own it rather than just the ability to visit it.
When comparing fractional ownership vs timeshares it is also important to consider what happens at the end of the process. With fractional ownership, you choose when to end the agreement by selling your fraction and taking the profits made, it has been a financial investment. Timeshares, however, simply come to an end when the lease concludes. You make no profit, you pay nothing more, but you also lose access.
Fractional Ownership vs REITs
REITs or Real Estate Investment Trusts are companies that purchase, sell, manage, and finance real estate. Fractional ownership is, instead, a group of individuals working together. A key difference showing how REITs work is that they are companies, therefore they can be floated on the stock market, traded, and sold. Typically this means that REITs focus on commercial or industrial properties such as hospitals, educational buildings, offices, etc rather than residential properties.
If you were to invest in a REIT you would have no real say in the operation of the company, that is up to the CEO and team within it. Meaning it’s more of a passive form of income (or loss). Fractional ownerships require the team of owners to come to a consensus, a far more active role to hold.
The beauty of fractional ownership is that you can invest as little or as much as you choose. Starting with as little as $1,000, you can become a part owner of incredible property. You’ll receive myriad benefits for minimal effort, definitely a win-win.
- Fractional ownership has considerably lower barriers to entry vs traditional property ownership.
- The more you invest the greater your fraction will be, meaning more use or more profits.
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