Fractional Ownership: Everything You Need to Know about the Investment Strategy
Real estate is among the best categories of investments regarding return on investment (ROI), a measure of net profit against cost, a number that includes purchase price and renovations. Real estate investment trusts (REITs) are especially fruitful investments, generating a median ROI of 11.8 percent, according to the S&P 500. Residential and commercial properties generate median returns of 10.6 and 9.5 percent, respectively. However, most people generally don’t have the available cash to buy and hold real estate for investment purposes.
REITs offer lower price points for investors looking to make money on real estate. Fractional ownership is another method through which individuals can invest in real estate by splitting the cost — and profits — of property with others. Below is everything to know about the investment strategy, including the pros and cons for real estate ownership.
What Is Fractional Ownership?
Fractional ownership is an investment strategy that involves multiple parties, each of which shares the expenses of an asset, typically a residential or commercial property, fine art, or luxury yacht. Individual investors have ownership rights and can use the property or items for an agreed-upon period and earn a share of any revenue generated from the asset.
There are two primary types of fractional ownerships and several different structures relating to real estate. Individuals or groups can purchase shares of an asset through an entity, usually a limited liability company (LLC), which maintains sole ownership. The other option is tenancy in common, which means each tenant or investor receives a deed for a percentage of the asset. Ownership doesn’t have to be split equally, meaning some investors can own a greater percentage than others.
Common Examples of Fractional Ownership in Real Estate
The most common example of fractional ownership in real estate involves shared investments in luxury vacation properties. In these scenarios, the investors split ownership responsibilities and privileges, allowing them access to expensive properties they otherwise might not have been able to afford on their own. They share the cost of maintaining the property and any increase in property value or sale price.
Fractional ownership isn’t limited to expensive vacation properties, however. Individuals can invest in a range of types of properties, including apartment buildings and storage units, through one of the many fractional ownership structures.
Fractional Ownership Structures
Timeshares are common examples of fractional ownership, although there are two different types. When you hear people discussing their desire to “get out” of their timeshare, it’s usually a shared-lease timeshare, which means they get to use the property for a specific time each year but do not receive any other benefits. In contrast, a shared-deeded timeshare is one in which the investors share the property’s deed and all profits from the lease or sale of the property.
Real estate syndicates, equity sharing, and crowdfunding platforms are the other common types of fractional ownership structures. In a real estate syndicate, which is usually restricted to accredited investors and more expensive properties, a lead investor oversees all investment and management activities. Equity sharing involves one group that provides capital and another that manages the property, with sale profits split according to terms of the deal.
Advantages
The biggest advantage that fractional ownership offers to investors, particularly in 2024 with high rates of inflation and property values increasing, is removing barriers to entry to investing in real estate. Through crowdfunding platforms, investors who can’t afford to purchase real estate on their own are able to grow their wealth through shared ownership of properties. In addition to the diversification that comes with not having one’s investment portfolio disproportionately tilted towards real estate, investors can choose from properties in a variety of asset classes. Other advantages compared to individual property ownership include shared maintenance costs and potential rental income.
Disadvantages
Less flexibility and freedom are among the main drawbacks of fractional ownership compared to traditional real estate investing. All investors need to be on the same page regarding major decisions, such as renovating or selling the property. Personal use of the property is also limited depending on how many partners are involved in the shared ownership. Most fractional ownership platforms do not yet have a secondary market, meaning you are locked into the investment for a certain period.
Fractional Ownership Platforms
There are now many different online platforms through which investors can purchase shares of properties. Arrived, one of the leading platforms in the space, received a $25 million funding round in 2022 and $37 million in seed funding, led by Jeff Bezos, the year prior. Uber CEO Dara Khosrowshahi and Zillow co-founder Spencer Rascoff are among the other notable investors.
Fundrise, HappyNest, and HoneyBricks are among other emerging fractional ownership platforms.
