Real estate is still the most popular investment option to accumulate wealth, particularly in the face of rising inflation and a volatile stock market. But, according to a Research Center survey, seven out of 10 Americans believe that today’s young adults are having a more challenging time becoming homeowners and saving their futures as their parents did, particularly since house prices have increased significantly than incomes in the past decade.
This has led to crowdfunding and shared ownership strategies in the property industry, including fractional real estate ownership.
What Is Fractional Real Estate?
Fractional real estate ownership is a method of purchasing a specific amount or percentage of the property. The property – in this case, a real estate property – is broken down into various portions or parts, which makes it accessible for purchase by many co-owners that have fractional ownership.
In fractional real estate investment, the expense of the house is shared across many shareholders, and the result is the income. The house’s worth grows, the rent increases, and so do the earnings and equity. The property is usually managed by a management company of a third party who takes care of repairs and maintenance. The owners of the property finance the cost.
Fractional Ownership Investment vs. Vacation Property
It is not the case that everyone who invests in real estate through fractional ownership does it to make money. For some, the fractional ownership option is the best option to have a second residence or a luxurious vacation home without purchasing it in full.
Fractional Ownership As An Investment
Fractional rental property ownership is usually an investment with a long-term return that can generate short-term rental income and long-term equity. Platforms like Arrived Homes permit non-accredited investors to buy shares of individual rental properties within some of the fastest-growing US rental markets.
It is essential to note it is not the equivalent of investing in a publicly traded REIT (Real Estate Investment Trust) that trades through the exchange for stocks. However, fractional ownership is sometimes classified as a REIT that is not traded, which can provide tax advantages for investors. The properties that rent on Arrived are all categorized as non-trading REITS. That means there are no limits on the types of investors (accredited and non-accredited) who can fund the investment. To ensure this is the case, investors on Arrived can invest up to 9.8 percent of the equity of each property.
Fractional Ownership As A Vacation Property
Fractional ownership of a vacation property is typically more about use than investing. When you purchase a small portion of a luxury resort property, for example, it is yours to use the property for a specific number of weeks per year, allowing you to take advantage of and utilize an asset you would otherwise have been unable to reach.
Owners of fractional ownership can utilize their time for themselves or give it to their family, friends, or colleagues. Property managers who manage fractional ownership vacation homes typically manage properties across several countries and locations, offering owners the chance to exchange time at home to purchase a property in another. Ownership rights in fractional properties can be transferred to the heirs.
Fractional Ownership Of A Vacation Home vs. Timeshare
The fractional ownership of vacation homes is often confused with the ownership of timeshares. However, there are significant differences to keep in mind while thinking about investing in real estate that is fractional.
- Ownership: When you purchase fractional ownership in a vacation property private residence club or a destination club, you will receive a deed to your equity share. You’re, in essence, co-owners with a number of other buyers. When you own a timeshare, you pay for use when you can use the property every year.
- Time: Timeshares are often owned by 26 or 52 individuals, allowing owners to spend a week or two in the home for a vacation. Fewer buyers purchase fractional real estate investments, giving each owner more time in the property.
- Resale: You cannot sell a timeshare as when you purchase timeshares, you are not purchasing the property; however, you can access the time within the property. The lack of ownership implies you can’t sell a timeshare. However, you can sell your fractional ownership of the property because you’ve acquired a part of the property. And, like any other property purchased in full, you are entitled to sell or gift it to someone else or put it into an estate.
When is fractional ownership in real estate a good idea?
There are many advantages of fractional ownership in real property. In addition to the ease of admission and the capability to benefit from the expertise of an external management team, you can also diversify your investment portfolio, which is more difficult with full ownership. Here are a few aspects of fractional real estate ownership to consider in making your decision.
Equity Or Time?
When you purchase a timeshare, you’re purchasing some of the time you’ll spend in the building. When you buy fractional ownership, it means that you’re buying capital. This can translate to hours spent on the property, for example, in the case of a vacation property. Still, in the end, you’re investing in a real estate investment that can provide you with rent income and a portion of the earnings when it appreciates.
In the case of fractional ownership properties, a property manager or platform can create a Limited Liability Company (LLC) or Limited Liability Partnership (LLP) to be the property owner. The percentage of shares you hold inside your LLC and the LLP will determine the amount in the real estate you have, and that is, in turn, the amount of rights you own.
If you’ve purchased 25% of the fractional ownership of an apartment rented out, for example, you’ll receive 25% of the rental. As you see, the worth of your property grows, and you sell your portion of the property for profit, much like an investment in real estate.
It makes sense for those who can’t afford a second home.
For many homebuyers, buying an additional home can be challenging to justify, mainly when it’s not something they’ll frequently use. It’s also financial and may be unattainable for those without co-owners. However, the possibility of investing in a second property or a rental property for vacations is challenging to overlook.
Fractional ownership can provide the potential for investment growth and infrequent use. When you share the rights to own the property with co-owners, it’s possible to use the property for a limited amount of time and not have to pay for an empty holiday home most of the time. It also allows living in a house that would have been hard to pay for if you bought the entire house.
When you wish to stay for more than 1-2 weeks in your vacation home, staying longer than 1-2 weeks is possible.
One of the main similarities between fractional and timeshare ownership is co-ownership. That can be described as having many owners of each unit. One of the main distinctions is the amount of co-owners.
Timeshares usually have between 26 and 52 owners who own a stake in the property they are renting, giving them one or two weeks throughout the year to use their time. If you use the fractional ownership model, buyers are significantly less typically between six and 12. That means that as the owner of a fractional ownership generally, you have greater access rights to use the property and more extended periods of occupancy over the year. This typically translates to approximately four to eight weeks.
When you’d like to invest in the real estate market but do not have the capital.
If you’re seeking an income from rental or real estate beyond the home you own for vacation and don’t have enough money to pay for the total purchase cost, fractional real estate ownership could be the ideal investment strategy.
Platforms like Arrived Home will allow you to purchase fractional ownership of homes in the area you want to live in and start you off for $100 to $15,000. If you are a co-owner of the property, such as a condominium, you not only receive an equal share of the rental earnings in proportion to the ownership and build wealth, but you also gain by letting the value of the property increase.
One of the most significant advantages of fractional real estate investing is how fast and easy it is to start creating your portfolio without saving time to make a down payment, having perfect credit, or even gaining more knowledge about the market. No matter how small, the investment will begin reaping benefits immediately, allowing you to get on the property ladder and gain by tenancy as soon as you start.
If you’re looking to have to have more power over the property you own.
In contrast to traditional real estate investments, in which fractional real estate ownership is possible, fractional property ownership doesn’t require you to handle the headache of maintaining your property (most times). The management team will typically handle all essential details, such as reports, marketing, billing, and reporting.
This is also the case for timeshares; there’s one significant distinction with fractional ownership owners: they have very little or no control over how their property is kept. The property is maintained according to the requirements of the company managing it.
It’s not the case for a fractional home. The amount of say you will be able to have is determined by the percentage of ownership you have in the property. However, you pay a property management team to oversee your investment and can influence how they behave on co-owners on behalf of the co-owners.
It is easier to invest in rental properties.
It’s easy to mix timeshares with fractional investing. However, there are many distinctions between the two types of ownership that you should take into consideration. Suppose you want to expand your portfolio and establish an income stream that is not dependent on and build equity in real estate investments. In that case, consider fractional ownership. Best way to choose.
Although residential real estate has recently proven to be the most long-term investment option, rational issues, and more outstanding upfront financial commitments hinder most people from participating. Our mission at Arrived is to enable people worldwide to create wealth through modern real estate investment at their own pace.
