Fractional property ownership may just be your ticket into the property market.
It’s no secret that property is expensive. Whether you’re looking to add to your real estate portfolio or you just want to buy your first home, reducing upfront costs can make all the difference, catapulting you into the real estate market.
As fractional ownership of property increases in popularity, people’s curiosity is naturally often accompanied by uncertainty and doubt. How does it all work? Will it really save me money? Is it risky?
Let’s try address a few of these questions here, with NFTY’s introduction to the fractional ownership of property.
So, what is Fractional Ownership?
Fractional ownership is when a certain number of individuals own a percentage of an asset, like property, and share the respective rights with each other. This allows people to pool their money with others, and to invest in property with smaller amounts of capital. It also means investors can buy a piece of several properties, spreading the risk, or perhaps for example that people saving for their first home, can jump on the property ladder a little sooner.
This co-ownership arrangement distributes the costs and benefits to the co-owners based on the percentage of the property they own. This is partly why fractional property ownership is so popular is due to the range of people it can benefit. Most people already struggle to buy property (depending on where you live and how much money you make) and this will only get worse should we head into a significant recession. The recession could negatively affect anyone looking to buy a property, including real estate investors, as banks often tighten lending criteria, and job markets soften.
Fractional property ownership allows investors to continue to expand their portfolios, spread their risk, and often even make a profit – all during a recession.
Since fractional property ownership allows individuals to invest significantly less in a signal transaction, the upfront costs can be greatly reduced, allowing investors to either save that money or to invest in even more properties. Therefore, this ownership model is frequently applied to high-end vacation homes, hotels, commercial buildings, or other properties whose purchase price would otherwise be out of reach.
How does it work?
In the case of a fractionally owned property, the owners agree to share both the costs (such as upkeep, repairs, and property management fees) and the benefits (such as personal use, equity, and profits from any future resale) of the property. The exact terms of these agreements vary, but that’s the basic concept. Most owners retain the services of a management company to help schedule when each owner will have access to the property, or to monitor tenants, and to ensure it’s regularly maintained.
While someone may purchase a fractional interest in a single property to own a second home, some fractional ownership structures, known as private residence clubs, provide members with access to a network of communally owned properties such as destination clubs and condo hotels.
Co-owners can also lend their usage rights to friends or family members or even rent them out to other people, depending on the terms of the agreement. The percentage of the property owned determines how much time that owner will be allowed to spend on the property and even how much say they will have in group decisions.
What are the Benefits of Fractional Property Ownership?
As we discussed previously, the main advantage of fractional property ownership is that it can reduce up front costs significantly, while spreading risk. Here are a few more benefits:
- More opportunities – As the cost of buying a property is reduced with fractional property ownership, you receive far more opportunities in terms of the types of properties that you can purchase (such as part of a factory unit, or hotel).
- Paying only for what you use – For those who only intend to use the property for a portion of the year, sharing a property may make more sense than purchasing property on your own. This applies to people who want to purchase holiday homes or second homes overseas.
- Reduced maintenance costs – Another advantage of fractional ownership is that the owners split the property’s maintenance costs. If something needs to be repaired, the cost is lower for each owner than it would be if any of the partners had full ownership. Similarly, regular cleaning and maintenance are less expensive.
- Deeded ownership – Fractional ownership gives you a deed to the fraction of the property itself, meaning that the value of your share in the property will increase or decrease in line with the property’s real estate value. This isn’t the case with timeshares for example.
- Jumping up the property ladder – As the entry point to real estate through fractionalised property is much lower than traditional methods of purchase, someone saving up for their first home can get on the property ladder much quicker. They could test the water in different locations and get familiar with markets, all with shared risk and return.
What are the Disadvantages of Fractional Ownership?
As with anything, there are also some disadvantages of fractional property ownership. These include:
- Difficulty finding realtors – Finding a real estate agent or bank willing to work with you to negotiate a mortgage on a collectively owned asset may be more difficult than the traditional process. Until now. This is one of the problems NFTY was formed to solve!
- Less flexibility – Since collective ownership can involve a degree of collective decision-making, depending on the agreement, it could take longer to make decisions as everyone has a proportional say. This also means that, depending on your shareholding in the property, that you may not have 100% access or control over what happens to the property.
Would you consider fractional property ownership? Let us know.
Disclaimer: All investments, including real estate investments, carry inherent risks such as asset depreciation, financial losses, and legal ramifications. The information in this blog is solely for educational, informational, and reference purposes. Before making legal or financial commitments, speak with a licenced real estate or financial professional.