Understanding fractional ownershipFractional ownership is commonly used for buying vacation homes or luxury items like boats or planes, but is also used for other types of assets such as art, stock and fashion items. Owners are issued a deed representing their fraction of the property. Fractional owners also take on the benefits and losses that come with ownership: If a vacation home grows in value over 10 years, individual shares appreciate, too. Co-owners share usage rights, income and access to their shared property proportionate to the percentage of the asset they own. Unlike a timeshare, fractional ownership means you own part of the second home itself, not just the time you can use it. There are a few common fractional ownership structures that we’ll dive into later. One is called tenancy in common and another is via an entity, like an LLC. Example: Sophie lives in Detroit, Michigan, and wants to buy a second home so she can winter on the West Coast. Her budget is $110,000, so she’s able to become a 1/4 fractional owner of a beach house valued at $440,000. The home has two other owners: James, who owns 1/4 and the Jones family who own 1/2 of the property shares. A local management company facilitates their renovations and property maintenance.
Co-owned second homes
TakeawaysFractional ownership is:
- A more accessible way to buy and own than purchasing alone
- When the cost of an asset is divided into percentage shares
- Property that’s owned and shared by multiple unrelated parties
In more detail:
What are the pros and cons of fractional ownership?Pros include:
- Each owner has express ownership of part of the property.
- Your capital goes further as a part of a collective buying power.
- You have greater control over when and how you stay than a timeshare.
- There are typically fewer owners to share with than a timeshare.
- You can sell your shares in the property whenever you want.
- Your shares can appreciate over time.
- You aren’t the sole owner of the property.
- You pay management fees, if you choose an external manager.
- Your shares can depreciate over time.
- It can be difficult to sell shares versus a whole property.