The Pros and Cons of Fractional Ownership

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Fractional ownership, or sharing ownership of a property or item, started out with corporations and individuals coming together to buy private jets. It was an ingenious idea, because aircraft are notoriously expensive, yet are used very little. Now this concept has moved into the residential real estate investment arena – usually in popular vacation destinations. However, there are several pros and cons to owning such a property. There are certain things to consider before purchasing or selling.

Defining

Fractional ownership is a simple concept that takes a property and splits the ownership up into portions. The owners then share the cost of maintenance, taxes, and other expenditures, and in return get the use of the property for a specified amount of time. Usually, these properties are in vacation destinations, and can be either a single unit or a multi-unit facility. These are sometimes referred to as asset-sharing or timeshares.

Pros

Fractional ownership has several pros going for it. First, it is seen by many as a residential real estate investment. Because the cost is shared, the investor can afford to purchase a more luxurious property than he could afford otherwise. In addition, it can be transferred or sold, and the hassle of management and upkeep is left to a management firm. This is a great option for someone who is only going to use a property for a limited time during the year.

Cons

On the other hand, there are several critics to fractional ownership. First, there are a number of scams, and anyone interested in a residential real estate investment needs to be wary of get-rich-quick schemes. Second, it is often very difficult to obtain financing, and resale can be difficult. Plus, there can be high management fees. A lack of control or input bothers some investors. Add to that, some owners are frustrated by their inability to use the property at their discretion.

Buying a Fractional Property

For anyone considering purchasing a fractional property, there are several things to consider. The primary step should be to hire a lawyer who has expertise in this area. Researching the management company and the developer are also a smart move. Finally, a real estate investor should calculate the expenses. Add up all maintenance costs, management fees, and taxes, etc and then divide that number by the amount of time spent there. Is it truly a residential real estate investment, or should it be considered a luxury expense?

Selling a Fractional Property

Selling a fractional property or converting a home into a fractional ownership can also prove tricky. To ensure avoiding legal entanglements such as property restrictions, the counsel of a good lawyer would be wise here as well. Of course, if the property is in a popular vacation destination that draws visitors back every year, it can be a great way to raise capital while still retaining part ownership. Plus, it is also a way to raise the overall selling price of the property.

For those considering venturing into fractional ownership, there are several things to consider. If it is viewed as a residential real estate investment, and the owner is comfortable sharing the property, it can be a great way to enjoy a location that might otherwise be out of reach. However, make sure to also consider the cons as well. Resale might be tricky and control is limited. Some investors find these restrictions difficult to live with. Just do the research before making the decision to enter into fractional ownership.

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