Real estate continues to be the preferred form of investment to build wealth, especially with rising inflation and the volatility of the stock market. However, according to a Pew Research Center survey, seven out of ten Americans think young adults today have a harder time becoming homeowners and saving for their future than their parents’ generation, especially as house prices have grown markedly faster than incomes in the last decade.
This has given rise to shared ownership and crowdfunding models in the real estate market, key among them fractional ownership in real estate.
What is fractional ownership in real estate?
Fractional ownership in real estate is a way of buying a portion or percentage of a property. The asset – in this case, a real estate property – is divided into several parts or fractions, making it available for purchase to a more significant number of co-owners with fractional interest.
With fractional real estate investing, the cost of the property is split between multiple shareholders, and so is any potential profit. As the value of the property increases, so does the rental income and equity. The property is usually maintained by a third-party management company that looks after the repairs and maintenance and is paid proportionally by the co-owners of the property.
Fractional ownership as a real estate investment vs. vacation property
Not everyone who invests in real estate as a fractional owner does so for the investment. For some people, fractional ownership is a fantastic way to own a second home or a high-end vacation property without buying it outright.
Fractional ownership as a real estate investment
Fractional rental property ownership is often a long-term investment that creates short-term rental income and long-term equity. Platforms such as Arrived allow non-accredited investors to purchase shares of individual rental properties in some of the highest growth US rental markets.
It should be noted that fractional ownership is not the same as investing in a publicly traded REIT (Real Estate Investment Trust), which is traded on the stock exchange. This said, fractional ownership can sometimes be structured as a non-trading REIT, which can have more significant tax benefits for investors. Rental properties on Arrived are all structured as non-trading REITS. To maintain this structure, Arrived investors can fund up to 9.8% of the equity in each property.
Fractional ownership of a vacation property
Fractional ownership of a vacation property is often more about usage than investment. When you buy a portion of a luxury resort vacation home, for instance, you get access to it for a certain number of weeks each year, allowing you to enjoy and use a property that you may have otherwise been out of reach.
Fractional owners can use their allotted time or pass it on to family members, friends, or colleagues. Property managers for fractional ownership vacation homes often oversee properties in multiple locations and countries, allowing owners to trade in time in their property for property elsewhere. Ownership interests in fractional properties can be passed on to heirs.
Fractional ownership of a vacation home vs. timeshare
Fractional ownership of vacation homes often gets confused with timeshare ownership. However, there are key differences to remember as you think about investing in fractional real estate.
- Ownership: When you buy fractional ownership in a vacation home, private residence club, or destination club, you receive a deed for your portion of the equity. You are, in effect, co-owning a property with several other buyers. With timeshare ownership, you’re paying for usage, that is, a certain amount of time you can spend on the property each year.
- Time: Timeshares are often owned by 26 or 52 people, thus giving each owner a week or two at the vacation home. Fewer buyers have fractional real estate investments, which allows each owner more time at the property.
- Resale: You cannot sell a timeshare because when you buy a timeshare, you are not purchasing the property but access to time in the property. This lack of ownership means that you cannot resell a timeshare. However, you can resell your fractional ownership of a property because you’ve bought a portion of that property, and, like with any other real estate purchased in full, you have the right to sell, gift, inherit, or place it in a trust.
Is fractional ownership in real estate worth it?
There are several advantages to fractional ownership in real estate. Besides the low barrier to entry and the ability to leverage expert knowledge through a third-party management team, you can also spread out your investments and diversify your portfolio, something that is much harder to do with whole-home ownership. Here are some aspects of fractional ownership in real estate to consider when making your decision.
When you want equity in a home
When you buy a timeshare, you buy a portion of the time spent in the property. With fractional ownership, you’re purchasing equity. This may translate into time spent at the property, such as a vacation home. Still, primarily, it means you’re making a real estate investment that can give you a rental income and a share of the profits as it increases in value.
With fractional ownership properties, a property operator or management platform will create a Limited Liability Company (LLC) or Limited Liability Partnership (LLP) to own the property. The percentage of shares you own in the LLC or LLP will determine how much of the property you own and, therefore, the proportion of rights you have.
If you’ve bought 25% fractional ownership in a home that’s rented out, for instance, you will be entitled to 25% of the rent. As the value of the home appreciates, you can resell your share for a profit, just like with a traditional real estate investment.
When you can’t otherwise afford or justify a second home
For many home buyers, purchasing a second home is difficult to justify, especially if it’s something they won’t be using frequently. Financially, it can be out of reach for many without co-owners. However, the investment potential of a second home or a vacation rental is hard to ignore.
Fractional ownership allows for both investment growth potential and infrequent usage. By sharing property ownership rights with co-owners, you can use the property for a portion of the time and not pay for a vacation home that’s sitting empty most of the time. It also gives you access to a home that might have been difficult to afford if you had been buying the entire property.
When you want to spend more than 1-2 weeks at your vacation property
One of the most significant similarities between timeshares and fractional ownership is co-ownership – that is, there are multiple owners for each unit. One of the biggest differences is the number of those co-owners.
With timeshares, there are often 26 or 52 owners with a stake in the vacation property, giving them each a week or two weeks in the year to use their time. In the fractional ownership model, the buyers are far fewer, often between six and 12. This means that as a fractional owner, you typically have more usage rights and more extended periods of occupancy in the property multiple times a year. This often works out to between four and eight weeks.
When you want to invest in real estate but don’t have the capital
If you’re looking for real estate or rental income outside of vacation home ownership but don’t have the cash to cover the entire purchase price, fractional ownership in real estate can be the perfect investment method.
Platforms like Arrived will let you buy shares in rental properties in your desired location and get you started for between $100 and $15,000. You get a share of the rental income in proportion to your ownership and have the potential to build wealth if the home's value appreciates.
One of the biggest benefits of fractional real estate investing is how quick and straightforward it is to start building your portfolio without spending years saving up for a down payment, having perfect credit, or learning about the market.
Easily invest in real estate
It is easy to confuse timeshares with fractional real estate investing, but there are significant differences between the two ownership arrangements that are important to consider. If you’re looking to build your portfolio and create a passive source of revenue while also building equity in real estate investments, then fractional ownership is the way to go.
While residential real estate has been the best long-run investment in modern history, operational headaches and more significant upfront financial commitments prevent many people from participating. At Arrived, our mission is to empower the world to build wealth through modern real estate investing on their own terms. Now, you can buy shares of properties, earn passive income, and build equity through home appreciation, all while we handle the rest. Browse through available properties to start investing in real estate today.
Disclaimers
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice.
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