fractional-ownership

What Is Fractional Ownership? Fractional Ownership In A Nutshell

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.

Key takeaways:

  • 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.

Connected Business Concepts

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Creative Destruction

creative-destruction
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

happiness-economics
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

Command Economy

command-economy
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.

Animal Spirits

animal-spirits
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

state-capitalism
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

boom-and-bust-cycle
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

Main Free Guides:

Scroll to Top
FourWeekMBA