Have you ever split the cost of a pizza with friends because you were each only eating a portion of the pie? That’s the basic concept of fractional ownership.Fractional ownership is when you split the costs of an asset – usually an expensive one, like a private jet or resort condo – with others while retaining a portion of ownership and usage rights to the asset. Just like with the pizza, you only pay for the portion you plan to use; for a jet, it’s the miles you’ll fly in it, and for a condo, it's the number of weeks a year you'll occupy the property. Once you pay for it, that portion becomes yours to enjoy.It seems simple enough, but there are pros and cons to fractional property ownership that make it more complicated than sharing a pizza. Here are things to consider before you jump into a fractional ownership agreement for a second home.
Fractional ownership pros
Expanded opportunity to own
Owning properties fractionally gives you the opportunity to own a portion of one or more properties – usually a resort condo or vacation home – in prime locales that might otherwise be outside of your budget. With multiple owners sharing the costs, you can enjoy all the amenities of a high-end, resort-like condominium property without breaking the bank.
Unlike a resort timeshare, fractional ownership gives you a deed to a fraction of the property itself, sometimes called a fractional interest. This means that the value of your share in the property increases or decreases in line with the property's real estate value. Any increase in value is divided equally and becomes gained equity for all fractional owners.
Unlike short-term vacation rentals, with a fractional ownership property you own actual property, giving you the right to use the vacation home according to your share. For example, if you own one-fourth of a share in a property, you hold the right to use the property one fourth – or 3 months – of the year. You can enjoy the home to the fullest extent of your share in the fractional ownership agreement.
Shared upkeep and maintenance costs
When you hold ownership of a vacation property using the fractional ownership model, you’re also responsible for only a fraction of the upkeep and maintenance. This includes the cost of taxes, HOA fees, repair bills, landscaping, utilities, property management companies and other expenses associated with shared ownership.
Lower upkeep and maintenance burden
Most fractional ownership agreements include provisions for long-term property management, with owners deciding together how to handle any issues that arise.
Potential rental income
A fractionally owned property can be rented out either as a short-term or long-term rental if the ownership agreement allows it. Depending on the terms of the agreement, all owners may earn a share in the proceeds of rental income.
Fractional ownership cons
Fewer financing options
Few banks provide mortgages for those looking to buy properties fractionally. You may need to shop around and consider other ways you might be able to finance your fractional ownership property.
Less flexibility and freedom
All decisions about maintenance, repairs and decor must go through all ownership partners, and this can be a hassle. If you ever want to sell a fractional property, the sale will also have to be approved by the other fractional owners. Most fractional ownership clubs also require you to maintain an agreement with the club or property management company associated with the home, with no option for self-management or management outside the company.
Limited travel opportunities
While it’s not unheard of to own shares in multiple fractional ownership properties in different locations, each one is a significant financial investment. Unlike the more traditional hotel stays or short-term rental properties, fractional ownership can limit your travel options to just one or two favorite spots, and you'll likely be staying in a resort condo, not a private, detached single-family home.
An alternative to fractional ownership
Fractional ownership has its pros and cons. Where fractional ownership falls short, Pacaso steps up. Pacaso’s professionally managed LLC co-ownership model gives you all the perks and lower costs of co-ownership with key differences that set it apart from fractional ownership resort clubs. Unlike fractional ownership resorts, Pacaso offers true property ownership of private, luxurious single-family homes in choice locations. Buyers decide how much home they want to own, from ⅛ to ½. Pacaso handles all maintenance and management, and offers easy and equitable scheduling on the Pacaso app. The homes cannot be rented out, so you have peace of mind knowing the property is only being used by a small owner group and their registered guests. And because the co-owner group collectively owns 100% of the home, owners can vote to remove Pacaso as program manager if they decide they’d rather self-manage. For more about buying a Pacaso, check out answers to some frequently asked questions.
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