What is Fractional Ownership? Definition and Examples

Fractional ownership in real estate is when individuals own a percentage of a property and share usage rights. Fractional ownership splits the cost of an expensive purchase among several people.

Understanding fractional ownership

Fractional 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.

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Takeaways

Fractional 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.

Cons include:

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.

What is tenancy in common?

With tenancy in common (TIC), each tenant holds an individual deed for a fraction or percentage of a commercial or residential property. There is one key difference between tenancy in common and fractional ownership: No one person or company is in charge. To be a TIC, individuals must own different percentages of the property while sharing the whole and managing it themselves.

What is fractional ownership through an entity?

Some properties split ownership via a structural entity like an LLC (limited liability company) or LLP (limited liability partnership). Since a separate legal entity defines the ownership, it’s no longer a tenancy in common. It’s not necessary to have an LLC to make a fractional ownership purchase.

Can fractional ownership apply to any purchase?

Many major purchases can be purchased via fractional ownership: luxury cars, yachts and boats, aircraft, recreational vehicles and, of course, real estate.

Can you finance fractional ownership?

Yes, you can finance fractional ownership of a property, but it’s less common than paying in cash. Fractional mortgages come with their own restrictions and are issued less often by lenders.

How are fractional ownership and timeshares different?

Fractional ownership differs from timeshares because you own a portion of the property. For the majority of timeshares, you only own time to use the property. Timeshares are also shared by many more families than homes owned via fractional ownership. A timeshare might have 50 or more families staying per year, while fractionally owned properties can have as few as two simultaneous owners.

What responsibilities do you have as a fractional owner?

Maintenance of fractionally owned properties typically falls to a third-party management company. If the property you share is recognized as a tenancy in common, the owners might take a more casual approach and assign property management tasks to individuals in the group.

How does ownership work for Pacaso?

Pacaso offers fully managed LLC co-ownership of a second home. Owners purchase from 1/8 to 1/2 of the property and share the rest anonymously with their fellow owners. From there, Pacaso handles all the maintenance, management and ongoing updates to the home. Ownership is easy and straightforward to ensure you spend time enjoying your second home, not managing it. Learn more about our residential listings, and see how easy it is to own a second home through Pacaso.

What is fractional ownership in real estate?