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 up into several parts or fractions, making it available for purchase to a larger 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 the 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 ownership of a rental property is often a long-term investment that creates short-term rental income as well as long-term equity. Platforms such as Arrived Homes 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 greater tax benefits for investors. Rental properties on Arrived are all structured as non-trading REITS, meaning there are no limitations on who (accredited and non-accredited alike) can invest. 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 themselves 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, giving owners the option to trade in time in their own property for a 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. There are, however, key differences to keep in mind 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 that 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. There are fewer buyers with fractional real estate investments, which allows each owner more amount of time at the property.
- Resale: You cannot sell a timeshare because when you buy a timeshare, you are not buying 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 bought 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 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’re buying 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, in the case of a vacation home, for instance, but primarily it means you’re making a real estate investment that has the potential to give you a rental income as well as 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. And 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, the purchase of a second home is difficult to justify, especially if it’s something they won’t be using frequently. Financially, too, it can be out of reach for many without co-owners. The investment potential of a second home or a vacation rental, however, is hard to ignore.
Fractional ownership allows for both investment growth potential and infrequent usage. By sharing rights of property ownership with co-owners, you’re able to use the property for a portion of the time and not pay for a vacation home that’s sitting empty most of the time. And it gives you access to a home that might have been difficult to afford if you were buying the entire property.
When you want to spend more than 1-2 weeks at your vacation property
One of the biggest 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 in which 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 longer 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 Homes will let you buy fractional ownership in homes in your desired location and get you started for between $100 and $15,000. As a co-owner of the property, say a condominium, not only do you get a share of the rental income in proportion to your ownership, but build wealth as the value of the home appreciates.
One of the biggest benefits of fractional real estate investing is how quick and simple it is to get started building your portfolio without spending years saving up for a down payment, having perfect credit, or learning about the market. Your investment – however small – starts reaping rewards straight away, enabling you to not only climb the property ladder, but make gains from tenancy immediately.
When you want more control over your property
Unlike traditional real estate investments, fractional real estate ownership does not require you to deal with the hassle of maintenance and upkeep of a property (most of the time). A management team will usually take care of all those necessary details, including reports, marketing, and billing.
While this is also true for timeshares, there is one key difference when it comes to fractional ownership: owners of timeshares have little to no control over how a property is maintained. It’s maintained accordinfg to the standards of the management company.
This is not so with a fractional property. How much of a say you have will be determined by the proportion of your ownership in the property, but you are paying a property management team to handle your investment, and therefore have a say in how they act on the co-owners’ behalf.
Easily invest in rental properties
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 larger 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 properites, earn rental income, and build equity through home appreciation, all while we handle the rest. Browse through available properties to start investing in real estate today.