Real estate is still the best way to build wealth, especially with inflation going up and the stock market being so unstable. A Pew Research Center survey, however, found that seven out of ten Americans think it's harder for young adults to become homeowners and save for the future than it was for their parents. This is because house prices have grown much faster than incomes in the last ten years.

This has led to shared ownership and crowdfunding models in the real estate market, with fractional ownership of real estate being one of the most important.

 

Just what is the definition of real estate fractional ownership? In real estate, what is fractional ownership?

In real estate, fractional ownership is a way to buy a portion or percentage of a property. The asset, which in this case is a real estate property, is broken up into several parts, or fractions. This makes it possible for a larger number of co-owners with fractional interest to buy it.

With fractional real estate investing, the cost of the property and the profit from it are split between a number of investors. As the property's value goes up, so do the rental income and the equity. Most of the time, a third-party management company takes care of repairs and maintenance on the property. The co-owners of the property pay for this service in equal parts.

 

Using fractional ownership as an investment in real estate vs. as a vacation property

Not everyone who invests in real estate as a fractional owner does it for the money. Fractional ownership is a great way for some people to own a second home or a high-end vacation property without having to buy it all at once.

 

Investing in real estate through fractional ownership

Fractional ownership of a rental property is often a long-term investment that creates short-term rental income and long-term equity. Non-accredited investors can buy shares of individual rental properties in some of the fastest-growing rental markets in the US through platforms like Arrived Homes.

It is important to note that fractional ownership is not the same as investing in a Real Estate Investment Trust (REIT) that is traded on the stock market. Still, sometimes fractional ownership can be set up as a non-trading REIT, which can give investors better tax breaks. All of the rental properties on Arrived are set up as non-trading REITS, which means that anyone, accredited or not, can invest in them. To keep this structure in place, Arrived investors can put up to 9.8% of each property's equity.

 

Fractional ownership of a vacation property

Most of the time, fractional ownership of a vacation property is more about using it than investing in it. When you buy a piece of a luxury resort vacation home, for example, you can use it for a certain number of weeks each year. This lets you use and enjoy a property that you might not have been able to afford alternatively.

Owners of fractional shares can use their time themselves or give it to family, friends, or coworkers. Property managers for fractional ownership vacation homes often take care of homes in more than one place or country, so owners can trade time at their own property for time at a property somewhere else. The rights to own a share of a fractional property can be given to heirs.

 

Timeshare vs. fractional ownership of a vacation home

People often mix up timeshare ownership with fractional ownership of vacation homes. There are, however, some important differences to think about if you want to invest in fractional real estate.

Ownership: When you buy fractional ownership in a vacation home, private residence club, or destination club, you get a deed for your share of the equity. In a way, you and several other buyers own the property together. When you buy a timeshare, you pay for usage, which means you can use the property for a certain amount of time each year.

Time: Usually, 26 or 52 people own a timeshare, so each owner gets a week or two at the vacation home. With fractional investments in real estate, there are less buyers, so each owner can spend more time at the property.

Resale: You can't sell a timeshare because when you buy one, you don't buy the property, you buy the property to use it for a certain amount of time. Since you don't own a timeshare, you can't sell it to someone else. But you can sell your fractional ownership of a property because you've bought a piece of it and, just like when you buy a full piece of property, you can sell, give, inherit, or put it in a trust.

 

Is real estate fractional ownership worthwhile?

Fractional ownership of real estate has many benefits. Spreading your investments and diversifying your portfolio is considerably easier than it is with full ownership, and it comes with additional benefits such a low entry barrier and access to expert knowledge via a third-party management team. When deciding, keep in mind the following details about real estate fractional ownership.

Whenever you're looking to build home equity,

The purchase of a timeshare is a financial investment in the use of a vacation property for a specified period of time. You are buying a piece of the business through a fractional ownership structure. Depending on the nature of the investment, this could involve spending time at the property (as with a vacation home), but more typically it refers to the purchase of real estate for the purpose of earning income via rent or equity through appreciation.

Property operators and management platforms that deal in fractional ownership typically establish a Limited Liability Company (LLC) or Limited Liability Partnership (LLP) as the legal owner of the property. You have rights proportional to the amount of property you own, which is determined by the number of shares you own in the LLC or LLP.

 

If you normally wouldn't be able to afford or justify a second home

The acquisition of a second house can be challenging for many home purchasers, especially if they won't be utilizing it much. Without co-owners, it may also be beyond of many people's financial reach. However, it's difficult to dismiss the investment potential of a second house or a holiday rental.

Infrequent use and investment development potential are both possible with fractional ownership. You can use the property to some extent and avoid paying for a holiday house that is mostly unoccupied by doing joint ownership with other property owners. Additionally, it provides you access to a house that, if you had been purchasing the full property, you might not have been able to afford.

 

When you wish to stay at your holiday property for more than 1-2 weeks

The fact that there are numerous owners for each unit is one of the main parallels between timeshares and fractional ownership. The number of those co-owners is one of the most significant variances.

In the case of timeshares, there are frequently 26 or 52 owners who have an interest in the holiday property, giving them each one or two weeks per year to use their time. The buyers in the fractional ownership arrangement are far fewer, typically between six and twelve. As a result, you frequently have broader usage rights and longer periods of occupancy in the property as a fractional owner. This often equates to four to eight weeks.

 

When you lack the funds yet wish to invest in real estate

Fractional ownership in real estate may be the ideal investment strategy if you're seeking real estate or rental income outside of vacation home ownership but lack the funds to pay the full purchase price.

You may start out for between $100 and $15,000 by purchasing a fractional ownership in a home in your selected region through platforms like Arrived Homes. As a co-owner of the property, let's say a condominium, you not only receive a percentage of the rental income in line with your ownership, but you also increase your wealth as the home's value rises.

One of the main advantages of fractional real estate investing is how quick and easy it is to start constructing your portfolio without needing years of down payment savings, excellent credit, or market knowledge. Your investment, no matter how modest, begins to pay off right away, allowing you to not only move up the property ladder but also benefit from tenancy right now.

When you desire increased authority over your property

Contrary to traditional real estate investments, fractional real estate ownership spares you the headache of dealing with a property's care and maintenance (most of the time). Reports, marketing, and billing are just a few of the important components that a management team will often handle.

This also applies to timeshares, but there is one significant distinction between them and fractional ownership: timeshare owners have little to no control over how a property is maintained. It is maintained in accordance with the management company's standards.

With a fractional property, this is not true. Your level of ownership in the property will influence how much voice you have, but since you are paying a property management company to look after your investment, you have a say in how they act on the co-owners' behalf.