What is fractional ownership in real estate? (+ pros and cons)

Published Date: November 13, 2023

Modern single family house
What is fractional ownership? Fractional ownership refers to a collaborative investment strategy where multiple parties share the expenses of a high-value asset, such as a luxury yacht or an upscale vacation property. In this arrangement, each investor retains specific ownership rights and entitlements to the asset based on their contribution.For instance, if you invest in a fractional ownership of a holiday home, you're essentially purchasing the right to use that property for a predetermined number of days or weeks annually. This approach allows individuals to enjoy the benefits of owning premium assets without bearing the full financial burden alone.In this post, you’ll learn what fractional ownership is, explore its pros and cons, and get answers to some frequently asked questions.

Understanding fractional ownership

You’ll typically find fractional ownership for real estate like vacation homes. However, fractional ownership can also come into play for art, stocks and fashion items. When owners purchase real estate assets with fractional ownership, they are issued deeds representing their fraction of the property. Fractional owners also take on the benefits and losses of ownership: 
  • If a fractional ownership vacation home grows in value over the years, the value of their individual share will appreciate. 
  • Co-owners share usage rights, income and access to their shared property proportionate to the percentage of the asset they own, as well as the cost of maintaining and operating the home. 
Fractional ownership is a great way to buy and own a property or another asset without purchasing it alone. It means all owners of an asset have divided percentage shares of a specific item or property. While families sometimes share ownership, fractional property owners can be unrelated.

Types of fractional ownership

A graphic shares the two types of fractional ownership.
There are two main types of fractional ownership structures: 
  • An entity, like an LLC 
  • Tenancy in common (TIC

Fractional ownership through an entity

Some properties split ownership by using a structural entity like an LLC (limited liability company) or LLP (limited liability partnership). This means that a separate legal entity defines the ownership.  

Tenancy in common

Tenancy in common (TIC) means each tenant holds an individual deed for a fraction or percentage of a commercial or residential property. However, no one person or company is in charge. With a TIC, individuals can own different percentages of the property but share it equally. Some TIC agreements are self-managed.

Fractional ownership vs. timeshares

Fractional ownership differs from timeshares because you own a portion of the property with fractional ownership. For most timeshares, you only own time to use the property — this is called interval ownership. Timeshares may be shared by as many as 52 owners (one person or group for every week of the year) while fractionally owned properties can have as few as two owners. 

Fractional ownership advantages

A graphic shares the pros of fractional ownership.
There are several advantages to owning a property through fractional ownership.

Expanded opportunity to own

Fractional investments allow you to own a portion of one or more properties — usually a resort condo or vacation home — in prime locales that might otherwise be beyond your budget. With multiple owners sharing the costs, you can enjoy all the amenities of a high-end, resort-like property without breaking the bank. 

Deeded ownership

Unlike a 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.

Usage rights

Unlike short-term vacation rentals, fractional ownership means you own actual property, giving you the right to use the fractional ownership 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 three 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

Using the fractional ownership model, you're also responsible for only a fraction of the upkeep and maintenance of the property. This includes the cost of taxes, HOA fees, repair bills, landscaping, utilities, property management companies and other expenses associated with shared home ownership. 

Lower upkeep and maintenance burden

Most fractional ownership agreements include provisions for long-term property management, with owners deciding how to handle any issues. Maintenance of shared ownership 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.  When you have fractional vacation home ownership through an entity, it will include preventative and routine maintenance, cleaning and property management in its ownership costs

Potential rental income

A fractionally owned property can be rented out as a long- or short-term rental if the ownership agreement (and location regulations) allows it. Depending on the terms of the agreement, all owners may earn a share in the proceeds of rental income. 

Fractional ownership cons

Though fractional ownership has its advantages, there are a few drawbacks to consider as well. 

Fewer financing options

Fewer banks provide mortgages for those looking to buy properties fractionally. You may need to shop around or consider other ways to finance your fractional ownership property, like special second home down payment options

Less flexibility and freedom

All decisions about maintenance, repairs and decor must go through all ownership partners, which can be a hassle. If you want to sell a fractional property, the other fractional owners must approve the sale, depending on your agreement. Some 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, investing in fractional ownership also means investing in the location you’re going to revisit. Of course, you can still vacation elsewhere, but it's something to factor into your travel plans and budget. 

An alternative to fractional ownership

Where fractional ownership falls short, Pacaso steps up. Pacaso's professionally managed LLC co-ownership model gives you all the perks and lower co-ownership costs with key differences that set it apart from fractional ownership resort clubs. Unlike fractional ownership resorts, Pacaso offers LLC co-ownership of luxurious vacation homes in choice destinations. Buyers decide how much home they want to own, from one-eighth to one-half of a property. Pacaso handles all maintenance and management, offers easy and equitable scheduling on the Pacaso app, and features a streamlined resale process in our co-ownership marketplace. 

Fractional ownership FAQs

Can fractional ownership apply to any purchase?

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

Can you finance fractional ownership?

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

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 manager tasks to individuals in the group. 

How does ownership work for Pacaso?

Pacaso offers LLC co-ownership of fully managed, luxurious  second homes in premium locations. You can choose how much of the home you own, from ⅛ to ½. 

Scheduling stays in your home is easy and equitable, using the Pacaso app. Plus, nobody can rent out a Pacaso, so you have peace of mind knowing that only a small owner group and their registered guests can use it.

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