What is Fractional Real Estate Ownership

Investing in real estate can help you diversify your portfolio and hedge against inflation. Real estate has a low correlation to other asset classes sold on public markets and typically appreciates during inflation.

Real estate investing requires knowledge, patience and research, but for many individuals, money is the biggest barrier to entry. Fortunately, there’s a way around it. Fractional real estate investing is helping people find their way into owning and benefitting from real estate.

Understanding Fractional Ownership

What is fractional real estate investing? Here’s what you need to know.

Fractional ownership allows you to gain partial usage rights to high-priced assets without paying full price. The value of an asset is divided into shares or fractions, allowing you to purchase a piece instead of the entire asset.

Not only can you buy what you once thought was out of reach, but you share the maintenance and operation costs with co-owners. You might benefit from appreciation in value once the asset is sold.

Fractional ownership doesn’t just apply to real estate. It can be useful for gaining access to any kind of high-value asset, including aircraft, boats, fine art and other luxury items.

Owning part of an asset gives you the right to use it, including how it gets divvied up is up to you and your co-owners. Annual proportions might be based on each purchase percentage or share. Alternatively, co-owners could reserve parts of the year or have rolling reservations based on availability.

How Does Fractional Ownership Work?

With fractional real estate, a company or investment group buys a residential or commercial property and breaks the cost into shares. Each share represents actual purchasable ownership of the property.

People often use fractional ownership to buy vacation homes or second residences, but you also can use your property as a long-term or short-term rental. This can provide passive income and property value appreciation.

There are two types of fractional real estate ownership: joint tenancy and tenancy in common. With joint tenancy, owners hold equal shares in a property, giving each owner equal rights. Tenancy in common yields partial shares that vary in value, interest and rights.

While fractional real estate sounds like time-share arrangements, it differs in that you own real property. With a time-share, you only gain access to a property during a set period each year.

Pros and Cons of Fractional Ownership

Like any type of investing, fractional real estate investing has positives and negatives. Consider these pros and cons when deciding whether it’s right for you:

Pros

• Lower barrier to entry 
• Diversification
• Potential for appreciation

Cons

• Lack of liquidity
• Conflicts with co-owners
• Accreditation requirement
• Asset performance
• Fees and expenses

These potential tradeoffs make it clear that fractional ownership might not be for everyone.

Understanding Real Estate and Fractional Ownership

With the options available in fractional real estate investing, there’s no reason to feel shut out of the market. Here are three real estate investments you might make.

Commercial Real Estate

Fractional investing in commercial real estate gives you access to institutional-sized property deals. By pooling funds with others, you could earn passive income from businesses paying rent or benefit from value appreciation. These deals typically require you to remain invested for five to 10 years.

Residential Real Estate

Residential properties in popular vacation spots or vibrant urban centers are prime targets because of the advantages and flexibility they offer investors. For instance, vacation homes might also be used as rental properties that deliver passive income when available.

Deeded Timeshares

When you buy a deeded timeshare in a vacation resort, the property is yours until you sell it. Unlike conventional timeshares, you receive a deed, which gives you rights and interests in the resort, and you can sell the timeshare or pass it on to others.

Fractional Ownership Structures

Fractional ownership comes in many forms. Here’s a look at a few ways to get started.

Crowdfunding Platforms

Crowdfunding platforms like Yieldstreet and Arrived Homes are newer kinds of investing for fractional real estate ownership. With little money, you can access properties to diversify your investment holdings.

These platforms can enable you to benefit from passive income, but you’ll have little say in the investment. Transparency can be an issue, and some sites require you to be an accredited investor.

Real Estate Syndicates

Real estate syndicates pool money to fund projects larger than individual investors could afford.

The group typically adopts a business structure like a limited liability corporation or limited liability partnership, with a general partner managing operations. Limited partners provide the capital and have little to no say in decisions. These projects typically require you to stay invested for five to seven years.

Equity Sharing

If you own a home and want to buy another, one way is through equity sharing. Homeowners can access the equity in their homes to use as a downpayment on another home.

The agreement with an equity-sharing company isn’t a loan, so there’s no monthly payment or interest. However, you’ll pay back the amount given to you — typically 5%-20% of your home’s equity — plus a percentage of any appreciation in your home’s value.

That could be a large payment if your home value grows over the 10 or 30 years of the term. Also, you must pay the costs of an appraisal and title insurance, taxes and other fees upfront.

Exotic Assets

From baseball cards to farmland to rare trees, all manner of exotic assets are available for investing. This is a good way to nab shares of assets formerly beyond your reach, such as fine art through the platform Masterworks, high-end collectibles through Rally or race horses through RaceShare and MyRacehorse.

Aviation

Do you desire access to private aircraft? Fractional ownership of a jet might be for you. Fractional aircraft ownership allows you to own anywhere from 1/16 to 1/2 of an aircraft and receive the attendant tax advantages without the full cost of buying one.

Industry leaders like NetJets, Flexjet and Wheels Up offer confidential ownership and the ability to fly when you need. Your expenses may include operating costs and fees for maintenance and storage.

Yachts

Whether you call it fractional yacht ownership, yacht co-ownership or yacht share, you can own 1/8 of a yacht and share the purchase price and operating costs with other owners. Your buy-in is lower with other owners, and a management company maintains the yacht.

Compare Fractional Real Estate Investing Platforms

Consider Whether Fractional Ownership Is for You

Fractional ownership allows smaller investors to access high-end assets that are typically out of reach for investing. However, financing might require more specialized lenders, and due diligence is vital. For this reason, it’s important to know what you’re getting into and weigh all the variables before making any decisions.

Frequently Asked Questions