If you have been considering the purchase of a vacation home, consider fractional ownership as an alternative to time shares, VRBO, or AirBNB.
What is Fractional Ownership?
Fractional ownership of a vacation home is exactly what it sounds like. Several different individuals have the ability to own a fraction of their dream vacation home, while splitting the demands and costs of maintenance and upkeep with other owners. It is common to split the ownership of the property between 4-8 owners (each having one quarter to one eighth ownership).
Fractional ownership must be set up properly as an LLC, with carefully crafted legal contracts to protect the separate owners. Several services such as Pacaso, Ember, and Kocomo have developed a streamlined process to facilitate fractional ownership for interested parties. These services do charge a pretty penny for their role in creating a convenient, dreamy vacation home experience.
Pros of Fractional Ownership of a Vacation Home
There are many obvious advantages to choosing fractional ownership over purchasing a vacation home on your own, including dividing the costs of maintenance with the other owners. A fractional model may allow you to own a property in a location or of a size or quality that would otherwise be out of your budget.
Fractional ownership is true ownership, which means that the financial value of your portion of the property would increase as the property value increases. An eighth or quarter owner would have access to the property for 6 or 12 weeks per year, respectively. You could live in the property during your allotted usage time, or rent it out to receive added income or to offset costs. Additionally, if you happen to have a substantial budget and a desire to own vacation homes in several locations, fractional ownership would be an effective way to accomplish this.
Cons of Fractional Ownership
The primary cons of fractional ownership include lack of flexibility and the potential for a negative experience with your co-owners. Fractional ownership, as opposed to simply vacationing in hotels, resorts, or VRBOs and AirBNBs, means that your vacation destinations may be limited to one or two favorite locations. Certain desirable vacation dates may also need to be rotated, meaning that if you desire to spend Christmas at your vacation home, you may only get the chance once every 8 years.
There is also the possibility that you will have a negative experience with your co-owners. Maybe there is someone who doesn’t care for the property, doesn’t make their payments or pays late, leaves a mess, etc. As an LLC, it is similar to having a bad business partner, and legal action may be required in order to extricate this difficult owner from the situation.
Conclusion: Do It Right, or Don’t Do It
If you are considering fractional ownership, we have a bit of friendly, non-binding, non-legal advice. If you are going to enter into a fractional ownership agreement for a vacation property, make sure you do it right. Utilize a professional fractional ownership service, or hire a good attorney to draw up the contracts for you. Be cautious about entering into fractional ownership agreements with your close friends or family members. We could tell you many tragic tales of families being torn apart over similar contractual agreements.
To listen to our full podcast about vacation home fractional ownership click here.