Fractional Real Estate Investment Explained: Alternative Investing
Affordable Property Purchasing With Fractional Real Estate Investment
Want to take your first step onto the property ladder but lack the huge amounts of capital required? Fractional real estate investment is for you.
You’d be forgiven for asking what fractional real estate investment is. After all, it’s not a huge sector, but it is certainly growing in popularity across America. In this article, we’ll answer what fractional real estate is, and how the process works, plus we’ll explore some of the many benefits that fractional real estate investing affords investors.
Table of Contents
What is Fractional Real Estate Investing?
Fractional real estate investing is a form of investment that offers an alternative approach to property ownership by allowing you to own a portion, or fraction, of a whole property. When compared to purchasing the entire property, this results in a much lower investment in terms of the purchase price (including initial fees, etc) and ongoing maintenance costs. As a fractional investment owner, you own your own title deeds and have complete control over your share. That means you can decide whether you sell it for a profit or pass it on to your beneficiaries.
How Does Fractional Ownership Work?
All parties involved in the property share both the costs and the benefits in fractional ownership. This can include making partial use of the property, increasing equity, and profit from rental or sale. A management company, usually chosen by an owners committee, handles the property’s day-to-day operations, such as maintenance, bookings, and collecting rental payments, and charges a fee before distributing profits to the owners. Some groups choose to arrange this all themselves privately, but more and more people are finding other methods including using online platforms such as Getaway to make the process straightforward.
Fractional ownership can refer to a single property or a network of properties through a fractional ownership club, which provides owners with access to multiple establishments across the country.
The extent of fractional owners’ benefits and responsibilities is proportional to their ownership percentage. As a result, if someone owns 5% of the property, they will have access to it for 5% of the time (if it is used as a vacation rental) and will receive 5% of the rental or sale profits. A higher percentage of ownership means more time and profits.
Fractional Ownership vs Timeshares
Timeshares were a popular type of partial ownership that gained popularity in the 1970s and 1980s. Although often confused with fractional ownership, there are significant differences between the two. While timeshares allow you to visit one or more properties at specific times during the lease period, fractional ownership allows you to own a portion of the physical property.
When comparing fractional ownership and timeshares, the outcome must also be considered. The agreement can be terminated with fractional ownership by selling the fraction and realizing the profits, making it a financial investment. A timeshare, on the other hand, ends simply when the lease expires, with no profit or additional payments but also no further access.
Why Should You Consider Fractional Ownership?
Investing in fractional ownership has a number of appealing advantages. One of the primary reasons it is a desirable investment option is that it allows individuals who want to invest in real estate but lack the necessary capital to do so independently. There are, however, considerably more reasons too:
- Shared Maintenance: Fractional ownership for vacation use reduces yearly maintenance requirements. For example, if a traditional vacation home is only used for four weeks out of the year, that leaves 48 weeks without proper upkeep. However, sharing the home with others ensures regular maintenance and a well-kept property with fractional ownership. Property management companies handle maintenance if you rent out your home.
- Shared Responsibility: The cost of repairing major issues, such as a damaged roof, is shared among co-owners with fractional ownership. When compared to being solely responsible for the property’s upkeep, this reduces both financial and mental stress.
- Passive Income: Paperwork and group decisions will take up a small amount of your time, but you will earn a consistent profit from your fractional ownership. Your investment, whether monthly or annual, will pay off.
Fractional ownership is a great way to get into the world of property investment with relatively small amounts of capital, even with amounts as small as $1,000. The benefits are there to be taken, it’s just a matter of finding the right opportunity for you and your investment.
- In fractional ownership you own your portion of the property as you would a whole property, you can sell or leave your deeds.
- Larger investments garner more profits and a bigger say in property issues.
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