In this issue of Doug Talks...
Fractional Ownership in Real Estate
What is Fractional Home Ownership?
Fractional ownership refers to a collaborative investment strategy where multiple parties share the expenses of a high-value asset, such as a luxury yacht or an upscale vacation property. In this arrangement, each investor retains specific ownership rights and entitlements to the asset based on their contribution. For instance, if you invest in a fractional ownership of a vacation home, you're essentially purchasing the right to use that property for a predetermined number of days or weeks annually. This approach allows individuals to enjoy the benefits of owning premium assets without bearing the full financial burden alone.
Understanding fractional ownership
When owners purchase real estate assets with fractional ownership, they are issued deeds representing their fraction of the property. Fractional owners also take on the benefits and losses of ownership: If a fractional ownership vacation home grows in value over the years, the value of their individual share will appreciate.
Co-owners share usage rights, income and access to their shared property proportionate to the percentage of the asset they own, as well as the cost of maintaining and operating the home.
Fractional ownership is a great way to buy and own a property or another asset without purchasing it alone. It means all owners of an asset have divided percentage shares of a specific item or property. While families sometimes share ownership, fractional property owners can be unrelated.
There are two main types of fractional ownership structures:
-An entity, like an LLC
-Tenancy in common (TIC)
-Fractional ownership through an entity
Some properties split ownership by using a structural entity like an LLC (limited liability company) or LLP (limited liability partnership). This means that a separate legal entity defines the ownership.
-Tenancy in common
Tenancy in common (TIC) means each tenant holds an individual deed for a fraction or percentage of a commercial or residential property. However, no one person or company is in charge. With a TIC, individuals can own different percentages of the property but share it equally. Some TIC agreements are self-managed.
Fractional ownership vs. timeshares
Fractional ownership differs from timeshares because you own a portion of the property with fractional ownership. For most timeshares, you only own time to use the property — this is called interval ownership. Timeshares may be shared by as many as 52 owners (one person or group for every week of the year) while fractionally owned properties can have as few as two owners.
Deeded ownership
Unlike a timeshare, fractional ownership gives you a deed to a fraction of the property itself (sometimes called a fractional interest). This means that the value of your share in the property increases or decreases in line with the property's real estate value. Any increase in value is divided equally and becomes gained equity for all fractional owners.
Shared upkeep and maintenance costs
Using the fractional ownership model, you're also responsible for only a fraction of the upkeep and maintenance of the property. This includes the cost of taxes, HOA fees, repair bills, landscaping, utilities, property management companies and other expenses associated with shared home ownership.
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