Is Fractional Ownership A Good Alternative To Buying Rental Property?

Real estate is a great way to build wealth, but not everyone can afford to plunk down hundreds of thousands of dollars to purchase a rental property.

That makes fractional real estate ownership — or buying a percentage of a property — an attractive alternative to owning it outright. The cost of the property is split between multiple shareholders, who also share the profit and the cost of upkeep.

Owners of fractional properties usually pay a fee to a real estate management company for taking on the duties of a landlord. Those duties can include renovating the property, marketing it and finding renters, signing contracts, filing taxes and day-to-day administrative duties.

Keep in mind that fractional ownership is not the same as investing in a real estate investment trust (REIT) that’s traded on a stock exchange. REITs are companies that own or finance income-producing property. They handle leasing and rent collection and distribute that income as dividends to shareholders.

Structuring Fractional Ownership

The operator of a fractional property will create a limited liability company (LLC) or limited liability partnership (LLP) to own the property. You buy a percentage of the shares in the LLC or LLP, which determines how much of the property you own and how much weight you carry when making decisions about it.

Typically regarded as a way to own vacation property, fractional ownership is among the most misunderstood sectors of the real estate market. It is often confused with a timeshare where the buyer is purchasing a certain amount of time in a vacation home but doesn’t actually own the property.

But people who buy a fraction of a property own real estate that can be sold, gifted or inherited. If it’s a vacation property, the owners can also rent out their share of it to earn income on it if they can’t use it.

As with any other real estate investment, owners of fractional properties must hold their share for the long term to allow it to appreciate. But if you run into financial difficulties and need to sell the property, it’s usually easy to find a buyer for it.

Latest Fractional Real Estate Market Insights

• Arrived Homes expanded its offerings to include shares in short-term rental properties with a minimum investment of $100. The platform has already funded over 150 single-family rentals valued at over $55 million. Read more...

• The Flagship Real Estate Fund through Fundrise is up 7.3% year to date and has just added a new rental home community in Charleston, SC to its portfolio. Real more...

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