While the real estate market is constantly changing in today’s economy, so are the ways people can invest in the market. As the national media continues to highlight rising mortgage rates and median home prices, fractional ownership is gaining traction as a way to possess equity in the real estate market without the ballooning costs of a mortgage. But what is this newer concept and how does it work in the real estate market?
How Does Fractional Ownership Work?
Fractional ownership is a strategy that has been used for many high-cost products and services. This enables someone who may not be able to afford the item by themself to own a portion of it at a price within their budget. For example, one share of Chipotle stock costs more than $1,500. However, some brokerages allow traders to own a percentage of the stock for as little as $1.
This strategy has also been applied to high-dollar items like boats and planes. Now, it is becoming a popular concept in the real estate market. In much the same way as a high-priced stock, someone may not be able to afford an entire multi-million-dollar income property. However, they might be able to contribute a smaller amount to have a percentage of the ownership rights.
Fractional ownership can often be confused with other real estate ownership strategies, such as timeshares and Real Estate Investment Trusts (REITs). Its biggest difference from a timeshare is that fractional ownership entitles the owner to a percentage of the equity. If the property appreciates in value, the owner’s equity value will increase as well. Timeshares permit someone to use the property for a specified amount of time. Timeshare owners do not possess any equity, so they cannot enjoy the benefits of property appreciation.
How Is Fractional Ownership Different From REITs?
There are many key differences between the two, most notably that a person is investing in a portion of an individual property rather than a company that owns several income-producing properties at a time. REITs are both private and publicly traded companies that typically focus on similar types of commercial properties.
In a REIT, the company chooses which types of properties and how many of them are in the portfolio, leaving individual investors without a voice in the process. Fractional ownership, on the other hand, allows the investor to decide which properties they want to invest in and how much money they want to allocate to each ownership stake.
What Are Some Advantages Of Fractional Ownership?
Because of its unique structure, fractional ownership offers some key benefits for individuals looking to invest in real estate.
- By everyone contributing to raise the entire amount to purchase the property, it eliminates the need for a large mortgage with high fees and interest rates. This also means an individual can skip saving up a large down payment or building up their credit score to own an income property.
- It provides a management team to alleviate the stress of being the sole owner of a property. This team handles a lot of the daily tasks associated with ownership, such as maintenance, repairs, and billing.
- It enables the investor to choose where their money is going. Investors can invest in different locations, different property types, and different ownership percentages of each property based on what they prefer.
- Fractional ownership allows the owners to enjoy the appreciation of the property as it increases in value whereas timeshares do not. It can also provide the added benefit of being easier to sell your stake when you’re ready to exit because you are only selling your shares as opposed to an entire property or timeshare.
- Fractional ownership typically maintains the same tax benefits as owning an entire property, such as deductions for property taxes, interest, depreciation, and more. One should always consult with an accountant to ensure the appropriate tax benefits are applied correctly.
- It opens the door to investing in high-yielding properties that would typically be out of a person’s price range. Luxury homes in popular destination spots are expensive for a reason, but they can also offer high returns to anyone who has a stake in them. This strategy provides access to a budget range that was previously shut out of investing in such properties.
Summary
Fractional ownership is a term becoming more popular in many industries, and real estate is no exception. It presents an alternative way for people to capitalize on income properties without the typical barriers to entry like large amounts of money or property management expertise. It also maintains the advantages of investing in this industry, such as appreciation and tax benefits. As more and more people become aware of this strategy, many might see it as a smart option to invest their money.
