The Pros and Cons of Fractional Ownership of a Vacation Home
With summer fast approaching, you may be considering purchasing a vacation home. But even as hot home prices have begun to cool in some parts of the U.S., higher interest rates and limited inventory are keeping prices high in desirable locations, making the decision difficult for prospective buyers.
To make a vacation home more affordable, some resort communities offer different options like timeshares, which enable vacationers to purchase the right to use a property for a specific amount of time, or fractional ownership, in which a buyer purchases an ownership interest in a property along with other buyers. A major difference between the two is that while timeshares don’t offer an ownership interest, fractional ownership does. In other words, when you buy a timeshare, you buy time. When you buy a fractional ownership, you’re purchasing equity in a property.
Fractional ownership of a vacation home can offer several benefits and drawbacks. Here are some pros and cons to consider when evaluating whether it’s right for you:
Cost sharing: Fractional ownership allows you to share the cost of purchasing and maintaining a vacation home with other owners. According to Pacaso, most fractional ownership properties limit ownership to six to 14 parties per unit. This can make it more affordable and accessible compared to owning a property outright, particularly when it comes to taxes and maintenance costs.
Ability to purchase a higher-end property: With fractional ownership, you can potentially afford a higher-end or more desirable vacation property that might have been out of reach individually. This, of course, depends on the number of parties allowed to purchase ownership shares.
Potentially greater use of the property: While timeshares often limit visits to one or two weeks per year, fractional owners can potentially use their property for a longer period, depending on the number of owners and their agreements.
Equity and income: If the property goes up in value, fractional owners can build equity in their vacation home, and when they aren’t using the property, they may be able to earn a portion of any rental income.
Diversification: By owning a share, rather than 100% of a property, you can choose to diversify your investment across different properties or locations, possibly reducing risk and increasing the variety of vacation options available to you.
Shared responsibilities: Property management tasks, such as maintenance, repairs, and cleaning, are typically shared among the fractional owners, reducing the burden on individual owners.
Professional management: Many fractional ownership arrangements come with professional management services, ensuring that the property is well-maintained and providing convenience for owners.
Asset titling: Normally fractional ownership engagements create a legal entity such as an LLC, trust or corporation. The entity could also either be for-profit or nonprofit, in which the entity owns the property and the co-owners own the entity. This is also advantageous for estate planning, and passing those assets to your beneficiary can help you avoid court intervention or a probate process.
Use of the property is still limited: Fractional ownership typically entitles you to use the property for a certain portion of the year, often divided into specific time slots. This limited usage may not align with your preferred vacation schedule, potentially limiting your flexibility.
Coordination and scheduling: Coordinating schedules and resolving conflicts among fractional owners can be challenging, especially when everyone wants to use the property during peak vacation periods.
Potential disagreements: Ownership disputes and conflicts can arise among fractional owners, such as disagreements over property management decisions or future sale plans. A clear and well-defined agreement is crucial to mitigate these risks.
Obtaining financing may be difficult: According to mortgageloan.com, an educational website that offers information about mortgages and loans, lenders tend to avoid making fractional mortgages because it could be harder to foreclose if one participant defaults. However, other options could include using a home equity line of credit, or HELOC, or builder financing. Your financial advisor can help you choose the best option for your situation.
Limited control: As a fractional owner, you have less control over the property and its management compared to owning a vacation home outright. Major decisions regarding the property may require consensus among the owners.
Resale challenges: Selling your fractional ownership share can be more challenging compared to selling a whole property. Market demand, finding interested buyers, and determining a fair price can be more complicated.
As with any legal contract, it’s important to thoroughly review and understand the terms and conditions of the fractional ownership agreement before committing to it. Consulting with legal and financial professionals who specialize in real estate can also provide valuable insights and help you make an informed decision.
If you are considering purchasing a vacation home in retirement but aren’t interested in fractional ownership, we discuss the pros and cons of owning a vacation home outright in this blog.