Fractional Ownership

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Although the real estate market might be experiencing a slight slow-down, many consumers are still looking for ways to improve their investment portfolios and offset the impacts of inflation. The argument has often been made that real estate represents one of the safer ways to invest and protect your money. However, with interest rates continuing to climb, and a recession creating a natural decline in consumer spending, is this a wise course of action? Depending on a variety of considerations, that answer is Yes. The question is will you go it alone? Or is Fractional Ownership the best way to go?

Let’s start by defining Fractional Ownership.

Unlike traditional property ownership in which one party has full investment in an asset, fractional ownership is an investment structure in which multiple parties have a financial interest. This approach allows the pool of investors to share both the costs and the benefits and is most commonly leveraged for high-ticket items such as vacation rental properties.

The beauty of this type of arrangement is that each investor holds title to a specified portion of the property. That means that their investment has the chance to appreciate when property values increase. This bodes well for those investors who are most interested in their financial growth and ROI.

Here’s a quick example…

Let’s say you join with three other investors to buy a property that is $500,000 with equal shares of 25%. In this example, the market is strong in your property’s area, and home values increase by 20% over a 3-year period. That brings the property’s value up to $600,000 – and each investor now has increased their asset by $25,000. Not too shabby!

Of course, we also must consider the other side of the ownership equation. Fractional ownership comes with all the maintenance needs and costs, taxes, and fees as any other private property obligation would. In addition, you may have closer involvement with the property management staff that is responsible for the coordination of your property maintenance and schedule of availability. That’s why having a fully detailed business plan that shows both your initial and ongoing costs and benefits is imperative to making the best decision.

“Is Fractional Ownership the same as a Time Share?”

Many property buyers out there may consider that fractional ownership is the same as a timeshare, and to a certain extent, that is true. “Time-sharing is a form of fractional ownership.” The key differences are that with fractional ownership, you own a percentage of the property overall. With a timeshare, you own a fixed block of time during which you can occupy the property. Both come with fees and are most typically coordinated by a property manager.

 

Fractional Ownership vs. Timeshare

 

What does the purchasing process look like?

In either case, you will need to have a solid purchase agreement that clearly spells out the contract terms, the benefits, the assets you are buying, and your financial obligations. Realtors may or may not be part of the transaction process. However, your attorney should definitely be by your side to read the fine print and ensure you are fully protected and aware of the details.

You should also consider discussing your potential purchase with a CPA so that you understand the tax implications.

Does this sound like a situation you’ve been considering? Let’s talk through your options and make sure you are fully informed and ready to own your slice of a vacation property! Contact the team at the Law Office of Adriana E Baudry. We are here to help.

 

Disclaimer: Please note that this blog is informational only and is not meant to provide legal advice. Each situation is different and requires informed care and decisions. Please seek guidance from a licensed attorney before proceeding with your transaction.

 

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