Fractional Ownership: How Co-Ownership Works in Real Estate

Did you know that 90% of millionaires worldwide got their wealth by investing in real estate? After all, well-chosen assets give investors a way to enjoy a year-round cash flow. They also appreciate over time, further improving investors’ potential income.

So, it’s no wonder that a third of US investors prefer real estate investments.

The thing is, with property prices going through the roof, it can be hard to buy one by yourself.

Don’t worry, though, as there are ways to get in on the real estate boom without shelling out everything on your own. Fractional ownership is one such method.

This guide covers the basics of buying property in “fractions” rather than as a whole, so be sure to keep reading.

What Is Fractional Ownership?

Fractional ownership is the percentage ownership of an asset, including real estate property. It’s a form of collaborative consumption in which a group of owners or users split the cost of the property. Thus, each buyer or investor purchases a part or share of the property.

For the same reason, each shareholder enjoys the asset’s benefits, such as usage rights. In addition, they receive a portion of the income earned through the property. Other perks of real estate co-ownership include priority access and reduced rates.

How Does It Compare to Timeshare?

A timeshare is similar to fractional ownership in that it also has shared usage rights. For example, each investor has the right to use the timeshare investment properties. However, like fractional properties, they can only do so during the time allocated to them.

Let’s use the Hilton Grand Vacations Club (HGVC) resort timeshare as an example. With this, owners can use the property during specific Hilton timeshare seasons. In most cases, it’s a one-week usage right during the bronze, silver, gold, or platinum season.

So, with a timeshare, an owner always has a guaranteed vacation place and timeslot.

Some property management companies also allow timeshare owners to rent out their properties. In that case, timeshare holders can turn the property into a short-term rental. However, they can only do that during their allotted time.

All in all, a timeshare gives investors ownership of time units and not part of the title itself. That makes it ideal for people who can afford to go on vacations every year.

By contrast, fractional ownership entitles an investor to a part of the title itself. Thus, if the property’s value increases, so does the value of the investment shares. That makes it a better option for people who want to go on yearly vacations on a property they co-own in writing.

How Do Fractional Ownership Agreements Work?

With fractional property, buyers enter into a shared real estate ownership agreement. That includes dividing the costs of the property and sharing the benefits of the asset. In most cases, a property management company arranges the contract for this setup.

The primary (and the biggest) cost is the actual property purchase price. On top of that are the shared costs for maintenance, repairs, and property management fees.

On the other hand, benefits include personal use, equity, appreciation, and rental income. Moreover, co-owners get a share of the profits made from re-selling the property in the future.

It depends on the property, but you can buy a more sizeable portion than the other co-owners. In doing so, you earn more rights to the asset, such as more time for personal use or a higher income share. However, you’d also be responsible for more purchase and maintenance costs.

What Are Common Co-Owned Property Rules?

Fractional owners who want to use the home for personal needs often need to schedule it first. In most cases, they usually have to do so through the property management company. The manager then contacts the other owners to let them know about such requests.

Moreover, the length of time an owner can use the property depends on their owned fraction. Most agreements stipulate this in the contract, usually as weeks or months per year. So, if you wish to spend a lot of time at the property, you may have to buy more fractions.

You don’t have to be the actual person to use your allotted time on the property. You don’t even have to consume all the days or weeks assigned to you. That’s because most agreements let co-owners share their rights with family or friends.

For example, you can have your parents or siblings use the property during your allotted time if you can’t. You may even be able to rent out the property to other part-owners and, in doing so, earn income. Another option is to rent it out to a third party throughout your allocated time.

Why Consider Fractional Ownership?

Houses in the US sold for an average of $477,900 in the fourth quarter of 2021. That’s $74,000 higher than Q4 2020’s average sales price of $403,900. Moreover, it’s almost twice the mean $259,000 sales price in Q4 2011.

So, it’s no wonder that as of February 11, 2022, the average mortgage loan size in the US amounted to $453,000. In addition, rates for fixed 30-year mortgages went up to 4.05%. That’s a considerable rate increase of 0.22% from the week before.

All those figures show how expensive real estate investing is if you do it yourself. Whereas if you go for fractional ownership, you’d have someone else to share the costs. That makes the property easier to invest in, as you don’t have to shell out the entire purchase cost.

Don’t forget the other expenses associated with property ownership, such as maintenance. For instance, the general advice is to set aside 1% of a property’s total cost for yearly maintenance. So, if you buy a home worth $453,000, you could end up paying about $4,530 a year for its care alone.

On top of those are the sales taxes and property taxes you may also have to pay. That depends on the location, as those in the Northeast often have higher property taxes. For instance, New Jersey’s effective real-estate property tax rate is a whopping 2.49%.

You don’t have to pay for all those taxes yourself if you only own a fraction of the property.

Plus, you may also include your stake in the property in your estate. In doing so, you can pass on your investments (and the rights that come with them) to your heirs. However, that also means handing over your responsibilities to your successors.

Extra Perk: Vacation Somewhere Else

Some property management companies manage properties in multiple locations and even other countries. These companies usually run programs that let owners exchange property rights. In that case, you may be able to swap usage rights with another owner of a different property.

For example, suppose you have a fractional property in California. Let’s also say your property manager oversees a vacation house in Florida.

If you want to go on a holiday in Florida, you may be able to do so in that other managed property. That’s because you may swap the rights to use the California property with the Florida house. So, you’ll have a place to stay in the Sunshine State while the other owner can use your Golden State property.

What About Potential Drawbacks?

One of the downsides to fractional ownership is the involvement of collective decision-making. That still depends on the agreement, though, but you can expect it to be present in one form or another.

For instance, any property improvement or repair usually requires all owners’ inputs. You won’t always be able to get your way since some of the part-owners may disagree with what you want. You may also have to wait for every other owner to have their say before you can start the improvement or repair.

That’s also why you may find it harder to sell your part of the property. That’s because everyone else who owns it may wish to screen all the people in your potential buyer list. They do own the property, after all, so they’d want to ensure the new owner is just as qualified as you.

Another potential drawback is getting the specific time you want to use the property. For example, suppose you usually go on a holiday during March, but one or more co-owners do the same. In that case, you may have to compromise and settle on who gets to use it during such times.

It’s also vital to note that fractional properties aren’t available in all markets. After all, selling property in portions takes more time than selling it outright to one buyer. That’s why they’re not as widely available as traditional primary or vacation homes.

So, Is Fractional Ownership Worth It?

Yes, you should consider fractional ownership if you don’t mind sharing a property. In doing so, you can get in on the real estate boom without paying for all the costs by yourself. Even if you don’t intend to rent it out, you can still enjoy it as it gives you a guaranteed vacation place.

So, if you want to invest, travel, and earn more income, you might want to co-own a property.

Ready for more articles like this? Then be sure to read more of our blog now!