Fractional ownership is percentage ownership in an asset where individual shareholders share the benefits in the asset. These benefits may include income sharing, priority access, reduced costs, or other usage rights. Fractional ownership occurs when an individual splits the costs of an asset with others while retaining a portion of the ownership and usage rights to the asset. This makes fractional ownership ideal for expensive items such as vacation homes, yachts, sports cars, high-end motor homes, and private jets.
Understanding fractional ownership
Fractional ownership requires the individual to only pay for the portion of the asset they use. For a vacation home, this may be the number of days or weeks per year they intend to occupy the premises. For a private jet, it may be the number of air miles. Individuals can also enjoy the benefits of part ownership in an asset. For instance, they may be able to collect rent on the vacation home or make money if the property appreciates in value.
In business, shares are sold to individual owners with a dedicated company managing the asset on behalf of the owners. These owners pay a monthly or annual fee for management services plus a variable fee based on usage.
Fractional ownership should not be confused with timeshare. While there are obvious similarities between the two approaches, fractional owners own part of the title of an asset while timeshare participants purchase units of “time”. This means a fractional owner can sell their stake in an appreciating asset to realize a capital gain.
Advantages and disadvantages of fractional ownership
In addition to realizing a capital gain, here are some more advantages of fractional ownership:
- Lower entry costs – fractional ownership makes expensive assets more accessible to those who are unable to meet the costs of full ownership.
- Lower maintenance costs – the approach also reduces maintenance costs since each fractional owner can share the cost of maintenance with others. Depending on the asset, maintenance costs may include property taxes, repair bills, utilities, fuel, service staff, insurance, and vehicle registration.
- Diversification – fractional ownership gives investors exposure to a wider portfolio of assets. The average consumer may never own a seaside apartment or luxury sports car outright, but diversified part ownership is a viable and sometimes lucrative strategy.
With those advantages in mind, let’s take a look at some of the drawbacks:
- Smaller returns – with only part ownership in an asset, any capital gains are not as significant as those that could be enjoyed from outright ownership.
- Fewer financing options – it is almost possible to fund the purchase of a fractional asset with bank finance. This is because the lender cannot use the asset as collateral when there are multiple owners.
- Less flexibility and freedom – important decisions must be made with consensus from all ownership partners, which can be problematic. For example, the sale of a fractional property must be approved by every partner before it can proceed. There can also be disagreements around usage, with one wanting to use a property for family vacations and another wanting to rent it out. What’s more, it may also be hard to find a buyer since many are cautious about entering into a partnership with people they don’t know.
- Fractional ownership is percentage ownership in an asset where individual shareholders share the benefits in the asset. These benefits may include income sharing, priority access, reduced costs, or other usage rights.
- Fractional ownership is not the same as timeshare, though the two are often confused. Fractional owners own part of the title of an asset, while timeshare owners are essentially purchasing time to use an asset.
- Fractional ownership results in lower entry costs, lower maintenance costs, and gives investors access to a diversified portfolio of assets. However, fractional ownership also reduces freedom, flexibility, and capital gain potential. It is also very difficult to secure traditional financing to fund fractional asset purchases.
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