The Pros and Cons of Fractional Ownership - Equity Estates Travel (2024)

13 Feb The Pros and Cons of Fractional Ownership

To understand fractional ownership, we first need to take it back to the 1970s, when vacationers first saw the emergence of something that at the time was deemed revolutionary: Timeshares, which provided an alternative to whole ownership of a vacation property. For the next three decades, timeshares reigned supreme in the world of one- to three-bedroom hotel-style suites and provided the perfect opportunity to “own” a vacation home with hotel-style services that would otherwise be financially out of reach.

Although it’s grown to be a $10.2B industry, timesharepopularity appears to have reached a crest in the 1990s.

Enter the sharing economy in the 2000s, which gave vacationers more choice, and less commitment through destination clubs and online travel rental portals like VRBO, Airbnb, and HomeAway. In one 2018 study, nearly 70% of respondents to the International Society of Hospitality Consultants’ annual survey said the appeal of timeshares fell as the popularity of home-sharing started to take off, especially in the luxury market where most timeshares cannot complete.

The rise of vacation rentals was two-fold: As guests felt more confident staying in strangers’ homes, more homeowners opened their doors to strangers. A look at Airbnb’s data shows this plainly. In 2014, Airbnb hosted about 10 million guests who stayed in any of the 800,000 listed homes worldwide. Fast forward to 2019, and about 2 million people were staying in an Airbnb each night, in as many as 6 million rentals around the world. Only a very small fraction of these would be considered luxury homes.

With so much demand for home-sharing accommodations, homeowners saw a path to second home ownership by supplementing their mortgage via vacation rentals. One HomeAway study suggests the average person who rents out their second home collected about $33,000 annually. Good for a vacation home valued under $1 million with low operating costs, but barely a drop in the bucket for a multimillion-dollar vacation villa with professional property management, daily housekeeping, pre-trip planning, and local concierge support. These homes often require $150,000 or more in annual operating expenses.

However, the vacation rental space wasn’t without its pitfalls. Inconsistent (or just plain bad) guest experiences, rising property management costs, and a plethora of unmanaged rental homes had a hand in the rise of the next phase in vacation homes where travelers were craving luxury and consistent quality: Fractional ownership.

And that brings us to now. By 2018, there were126 fractionally owned properties in theUnited States, which were most commonly divided into quarter shares.

So, what is fractional ownership, what makesit different, and is it for you? First, let’s answer a few basic questionsabout fractional ownership.

Fractional ownership FAQs:

How does fractional ownershipwork?

In fractional ownership, you own a share ofthe real estate itself and are issueda deed for the property, not a timethat you can use the home. This keeps the costs lower than whole ownership, butyou still have access to the home if you are satisfied with the sharing model.

Is fractional ownership a goodinvestment?

Compared to timeshares, yes. With fractionalownership, your share of the real estate rises as the value of the home riseswith the market, just like whole ownership.

Timeshares do not have a secondary buying market whereby someone is buying the home from the timeshare owners, rather, a timeshare seller must find a timeshare buyer. With no limit on supply, most timeshare owners are conditioned to getting a fraction of their money back when they try to sell, if they can at all.

Can you get a mortgage for fractionalownership?

Yes and no. As it’s still not a widespreadfinancial product, you’ll have to seek out banks that offer mortgages forfractional ownership, as it’s not likely regional or smaller banks would havethe systems in place to offer such a loan. However, they are out there.

Fractional Ownership: Pros andCons

Just like its timeshare and vacation rentalpredecessors, there are of course drawbacks to fractional ownership. Here are afew of the most pronounced advantages and disadvantages.

Pros

It’s more affordable

Perhaps a $4M home is out of reach, but $1M isright in your wheelhouse. Fractional ownership lets you get the home you wantin the most desirable location at the price you can afford. This goes for homeupkeep and maintenance, too. By sharing the costs of upkeep, fractionalownership makes long-term ownership a much more realistic possibility.

The home will get some love

No home should sit vacant 48 weeks out of theyear. By sharing the ownership, the home will be opened up at regular intervals. Opening and closing windows and doors,running the water, turning on the AC and heater, using amenities like the hottub and pool—all of theseare essential to maintaining the home. It provides an opportunity to identifyissues early on and preserve the home’s long-term value.

Peace of Mind

Fractional ownership also means sharing the burden of homeownership. Rather than asingle point of failure (i.e., you),you essentially have a group that shares accountability, schedules maintenance,checks on the home, and divides the work and chores that would otherwise beleft to a single owner.

But aswith anything, there are downsides to fractional ownership.

Cons

Selling can be a tedious task

In traditional fractional ownership, sellingisn’t as straightforward as whole ownership. While it’s by no means as hard as selling a timeshare, you’ll have to doresearch to check on how the ownership is structured and what restrictions mayapply with regard to your opportunity to sell your share.

Consensus can be tough

In fractional ownership, you’ll need to decideon everything from decorations to who, exactly, is allowed to use the propertyin your stead. When you’re working with groups of between four and 10 owners,this decision process can be long and stifling. And when some members want torent out their share via vacation rentals and others don’t, it can lead todiscomfort between the group, at best.

You’re tied into one location

In most cases, fractional ownership is tied to one property. If you or your family likes variety, this arrangement can be limiting. Some properties are part of an exchange program, allowing owners to trade their nights for another location with equal value. But most owners find it very challenging to match the location with the time of year they like to travel.

Restrictions may be present

As with vacation rentals and vacationproperties, fractionally owned homes could be subject to HOA restrictions,banned outright in certain areas, or hit with new forms of taxes aimed at homes that offertransient usage like rentals.

So, what came next?

We’ve seen what happened to timeshares overthe last 30 years, and we’ve seen the bumpy road vacation rentals have taken—with an uncertain future. Now, withfractional ownership on the rise, a new form of ownership that began in 2006 byan innovative vacation home investment company, has demonstrated success in offeringthe best way to own and enjoy a collection of vacation homes in a diversifiedmanner.

Luxury Residence Funds

Buyinginto a Luxury Residence Fund offers accredited investors the chance to seereturns from traditional real estate appreciation through a diversifiedportfolio of luxury residences around the world. And just like fractionalownership, the homes in the portfolio are yours to use when you want and areonly available to other investors—not the general public.

So, you get the returns of a passive investment vehicle, the control and peace of mind of a fund manager, and the joy of a vacation home, without ever actually having to take care of it, decide how or when to sell it, or come to a consensus with other owners. That’s the perfect combination for luxury vacation home ownership.

Learnmore about Equity Estate’sLuxury Residence Fund here.