Fractional Ownership vs. Timeshares: Everything to Know
Long gone are the days when a summer house on the coast or a cabin in the woods were your only options for a destination getaway. These days, you’ve got a wealth of different ways to vacation, including traditional luxury hotels, glamping, Airbnb, VRBO, timeshares, and fractional real estate ownership- to name a few.
Fractional ownership of real estate refers to when multiple people own a piece of property together. It’s becoming a popular way to invest in real estate, especially for vacation homes. But there are pros and cons to fractional ownership that you should be aware of before you invest.
Fractional Ownership
Fractional vacation property ownership is when you own a portion of a vacation home with other people. You typically have the property for a certain amount of time each year, and you’re responsible for paying a maintenance fee. The advantage of fractional ownership is that it’s usually less expensive than buying a vacation home outright on your own. The downside is that you have to share the property with other co-owners, and you may not have as much flexibility in when you can use it. However, fractional ownership does offer a number of other significant benefits over a traditional hotel stay or yearly timeshare, which we’ll get into below- so keep reading until the end.
What is fractional ownership?
Fractional real estate ownership, also called property sharing, is an ownership arrangement in which two or more people share ownership of a vacation home, investment property, or another real estate asset.
Under a fractional ownership arrangement, each owner has an undivided interest in the property and is entitled to use it for a specified period each year. The owners typically share the costs of maintaining and operating the property. Fractional ownership arrangements are becoming increasingly popular as an alternative to traditional second home ownership.
For many people, fractional ownership offers the opportunity to own a vacation home without shouldering the full financial burden of ownership. It also offers up several benefits as an investment asset, which differentiates fractional ownership from other vacation stay options, like traditional hotels or timeshares.
The primary difference is that fractional ownership represents an ongoing interest and stake in a productive piece of property, while timeshares (in most cases) and hotel stays end up costing you money and only offering a short-term stay in return.
How does fractional ownership of real estate work?
With fractional ownership, you own a share of the actual real estate asset rather than simply being able to use it at a certain time as you might with a timeshare. You're issued a deed for the property and also benefit from lower costs than traditional homeownership- plus, you get to spend time away from home at your favorite vacation spot.
Is fractional ownership a good investment?
Fractional ownership has the potential to be a great investment, in the right situation. It has become a popular investment option in recent years, as investors seek alternative investments to diversify their portfolios and take advantage of opportunities in the secondary market.
A fractional ownership investment allows an investor to own a portion of a property, such as a vacation home and share in the associated costs and benefits. The investor typically pays a one-time upfront fee, as well as ongoing maintenance and management fees.
The main benefit of fractional ownership is that it allows the investor to spread the cost of ownership over several years, and to share the risk with other owners. Additionally, fractional ownership can provide greater flexibility in terms of use and resale.
There are some potential drawbacks to fractional ownership, however. For example, the investor may be subject to the rules and regulations of the fractional ownership program, and may not have full control over the property. Additionally, the value of the fractional ownership investment may be more volatile than other investments, such as stocks or bonds.
Overall, fractional ownership can be a good investment option for those seeking to diversify their portfolios and take advantage of opportunities in the secondary market. However, it is important to carefully consider the risks and benefits before making any investment decision.
It’s also important to understand the costs involved. You’ll be responsible for a portion of the purchase price, as well as the ongoing costs of ownership, such as property taxes, insurance, and maintenance. You’ll also want to consider the benefits and drawbacks of fractional ownership before you make a decision.
Some of the myriad benefits of fractional ownership include:
- The opportunity to own a vacation home without shouldering the full financial burden of ownership.
- The ability to earn rental income when you’re not using the property yourself.
- You can acquire a fractional ownership interest for a fraction of the cost of purchasing a property outright.
Timeshares
A timeshare is a property, usually an apartment or condo, owned by an individual and used as a vacation home. The owner generally pays the resort or management company a maintenance fee to cover upkeep costs and amenities, such as swimming pools and tennis courts.
What is a timeshare?
Timeshares are usually sold as deeded property, which means the buyer has a deed to the property and is considered the owner. The buyer can use the property for a set period of time each year, usually one or two weeks, and then must turn it over to the next owner. There are also non-deeded timeshares, where owners are given an RTU or “right to use,” the property. In this scenario, they do not own a fractional share of the property- they simply have the right to use it at a certain time, which is a small but important distinction.
While timeshares can be an excellent way to vacation at a popular resort without having to pay the full cost of ownership, they also have some drawbacks. For one, the buyer is locked into a set period each year, which may not be convenient. And if the resort goes out of business or changes hands, the buyer may not be able to use the property at all.
Before buying a timeshare, be sure to do your research and understand all the costs and restrictions involved.
How does a timeshare work?
With a timeshare, multiple parties share ownership of a vacation property. Timeshares are most commonly sold as a deeded property, meaning each owner has a deed or contract to a specific unit or units at the resort. Each owner is then allotted a set amount of time to use the property each year. In most cases, this time is broken down into equal intervals, such as a week, every other week, or a month. Each owner pays a pro-rata share of the property’s purchase price, as well as annual maintenance fees.
What do I really own?
When you purchase a timeshare, you are buying the right to use a vacation property for a set period of time each year, either as a deeded or non-deeded owner. If you’re deeded, you own a fractional share of the property. If you’re non-deeded and you only have an RTU or “right to use,” you do not actually own the property, but you do have some ownership rights. These rights vary from one timeshare company to another, but they typically include the following:
- The right to use the property for a set period of time each year, more specifically, the week (or weeks) that you have purchased.
- If your timeshare company belongs to an exchange network, you'll be able to trade your timeshare week for a week at another timeshare resort in a different property or vacation destination.
- You can sell your timeshare at any time. You can sell it yourself or list it with a timeshare resale company.
Types of Timeshares
There are many different types of timeshares on the market, and each has its own unique features, advantages, and drawbacks.
Fixed Timeshares
With a fixed timeshare, you will own a specific unit for a specific week each year. This type of timeshare is perfect for those with a particular vacation schedule that they stick to yearly. You will always know precisely when and where your vacation will be, making planning other aspects of your life much easier.
Float Timeshares
With a "float" timeshare, you will have more flexibility in when you vacation. You will be able to choose your week each year, but you will not be tied to a specific unit. This type of timeshare is perfect for those who like to travel and don't have a set schedule.
Points-Based Timeshares
With a points-based timeshare, you will purchase a certain number of points that can be used to book vacations at any of the timeshare's affiliated resorts. This type of timeshare is perfect for those who like to travel to different places and don't have a preferred resort.
Right-to-use Ownership
Right-to-use ownership in a timeshare property gives you the right to use the property for a specified period of time each year, but you do not have a real estate interest in the property. This type of ownership does not entitle you to pass your ownership interest down to your heirs.
How Much Does a Timeshare Cost?
There is not a one-size-fits-all answer to the question, “How much does a timeshare cost?” The price of a timeshare will vary depending on a number of factors, including the location, size, and amenities of the unit, as well as the demand for vacation ownership at the particular resort.
However, there are more general ways you can go about estimating the cost of a timeshare.
The first step is determining the type of timeshare you’re interested in. There are two main types of timeshares: deeded and right-to-use. Deeded timeshares are actual ownership interests in a vacation property, while right-to-use timeshares are long-term leases. As you might expect, deeded timeshares typically cost more than right-to-use timeshares.
The next factor to consider is the location of the timeshare. Timeshares in popular tourist destinations will typically cost more than those in less desirable locations. For example, a timeshare in Orlando, Florida, is likely to cost more than a timeshare in Fort Wayne, Indiana.
The size of the unit is also a key factor in determining the cost of a timeshare. A larger unit will typically cost more than a smaller unit. Additionally, units with more amenities, such as a kitchen or washer and dryer, will generally be more expensive.
Finally, the demand for vacation ownership at the particular resort will also affect the price of a timeshare. The prices will be higher if there is high demand for units at the resort. Conversely, if there is little demand, the prices will be lower.
So, how much does a timeshare cost? There is no easy answer, as the price will vary depending on the abovementioned factors. However, by doing your research and knowing what to expect, you can get a general idea of the cost of a timeshare before making a purchase.
Timeshares and fractional ownership are both popular options for vacation property ownership. But what are the key differences between the two?
Timeshares
The term "timeshare" refers to when a group of people jointly own a property, but each owner has the right to use the property for a set period of time each year. The owners do not share the costs of maintaining and operating the property.
Timeshare Advantages
- The right to use the property for a set period of time each year.
- You don't have to share the costs of maintaining and operating the property with other owners.
- You can sell your timeshare interest if you no longer wish to use it
Timeshare Disadvantages
- You may not have the flexibility to use the property when you want to.
- If the property is not properly maintained, it can negatively impact its value.
- Timeshares do not appreciate in value- at least in a way that can be leveraged by the individual owner of a timeshare or timeshare RTU.
Fractional Ownership
Fractional ownership is when a group of people jointly own a property. Each owner has exclusive use of the property for a set period of time each year. The owners share the costs of maintaining and operating the property.
Fractional Ownership Advantages
- You have exclusive use of the property for a set period of time each year.
- You share the costs of maintaining and operating the property with other owners.
- You can sell your ownership interest in the property if you no longer wish to use it.
Fractional Ownership Disadvantages
- You may not have the flexibility to use the property when you want to.
- if the other owners do not properly maintain the property, it can negatively impact its value.
Why Fractional Ownership is Better Than Timeshare
As you can see, both timeshares and fractional ownership options have their pros and cons, but when you compare the two side-by-side, fractional ownership comes out ahead in several key categories.
Fractional Ownership Offers Greater Flexibility
Fractional ownership gives you more flexibility in terms of when you can use your vacation property. With a timeshare, you're generally locked into a specific week or two each year. But with fractional ownership, you can typically use your property for a set number of days each year and choose which months you want to use it. So if you want to take a winter vacation one year and a summer vacation the next, that's no problem with fractional ownership.
Better Quality Properties
Another big advantage of fractional ownership is that it generally comes with a higher quality of property than timeshares. That's because fractional ownership is usually found in luxury resorts, while timeshares are often more mid-range. So if you're looking for a 5-star vacation experience, fractional ownership is the way to go.
It's a Better Investment
Fractional ownership can be a better investment than a timeshare. That's because, with fractional ownership, you actually own a piece of the property. So when the property appreciates in value, you reap the benefits. With a timeshare, you don't own anything, so you don't see any financial return on your investment.
Conclusion
You’ve worked hard to put yourself into a position where you’re able to make your vacation home dream a reality. You’re one yard from the end-zone, and it’d be a shame if you fumbled before making a touchdown. Before making any real estate investment, fractional or otherwise, it’s important that you do your due diligence and that you land on a solution that fulfills your needs and wants for a vacation property.
Timeshares have their value, but primarily as a consumption service rather than an investment in your future. Fractional ownership gives you a real stake in a property, and the pride of ownership that only comes from actually owning a piece of something, rather than just the right to use it on a certain schedule. The fact that you can use it to get away from the humdrum of daily life is just the icing on the cake.