Fractional Ownership Versus Timeshare
What’s the difference between fractional ownership and timeshare? Even seasoned investors are sometimes confused about the distinctions between these two types of real estate holdings. Over time, the lines have blurred; but for the sake of security and satisfaction, it’s important to know how they differ. You could find yourself with something that doesn’t meet your personal or financial needs if you have misconceptions or unrealistic expectations about either one.
What is Fractional Ownership?
Fractional ownership is partial ownership or “co-ownership” in property and land. A group of investors each own a fraction or share of the property. The fraction of ownership depends on how many people buy into it. So if eight people buy in, they each own 1/8th of the property. If six people buy in, they each own 1/6th of the property, and so on. The higher the fraction of ownership, the more time you have to access the property for your use. Most fractional ownership terms limit the number of owners to keep it appealing to each owner.
With fractional ownership, you and the other co-owners own the building(s), the land and the contents of the buildings (furniture, appliances, etc.) Think of it as a regular house. If you own a house with another family member on the deed, each person technically has a 50% stake in the ownership of the building, the land, and all the contents. It’s the same with fractional ownership, except your fraction is smaller and you probably won’t personally know the other owners.
As far as for the use of the property, your time is allocated in weeks according to your fraction of ownership. Depending on how many shares you own, you may have two, three or more weeks available for your use. Two weeks is usually reserved for the maintenance of the property. During this time, no owner has access so that that work can be completed promptly without disturbances or interruptions.
The costs of fractional ownership aren’t limited to the initial buy-in. Like any other property, there are expenses associated with ownership. In the fractional ownership model, these expenses are allotted according to percentage owned. So an individual with higher fractional ownership would be responsible for extra shares of expenses. Expenses that are associated with fractional ownership property include things like maintenance and repairs/replacements, property management, property insurance costs, HOA fees, accounting, and tax preparation. Many of these expenses are rolled into one annual fee, for which each fractional owner is responsible. One-off expenses like a new roof or replacement of a broken appliance are handled and allocated to owners as they arise.
There is much freedom with fractional ownership real estate. The rules are determined, not by a corporate governing body, but by the owners themselves. As such, owners can choose to use their fractional ownership in a variety of ways. They may personally vacation a couple of weeks a year at the property and rent out their remaining weeks for passive income. If a year goes by and they won’t be able to vacation, they may rent out all of their weeks. They may sell one or all of their shares at any time.
Finally, fractional ownership is true ownership. If for any reason the owners all decide to sell, each owner receives a portion of the proceeds. It’s a true real estate asset.
What is Timeshare?
There are several different forms of timeshare. The most common form is “undeeded.” That is, the timeshare participant doesn’t own any portion of the property. The timeshare contract simply grants rights to use of the property for a pre-determined length of time.
In a timeshare, a corporate entity sells blocks of time to participants. The blocks of time are in weeks. There may be as many as 51 other timeshare interests in one property, with one week allocated to each participant. You usually have options for which week you can use the property. In some cases, the timeshare corporation may offer multiple properties, possibly in different countries. For instance, your timeshare buy-in may entitle you to a choice among a condo in Florida, a villa in France or a luxury hotel in Ecuador. If you have sufficient shares and that week is available, you might be able to stay in your choice of accommodation during your week.
Timeshares include annual costs, too. There’s usually an annual fee that you have to pay on top of what you paid for your right of use week(s). The fee can be upward of $2500, depending on the individual timeshare. This fee goes toward property management, taxes and repairs, and maintenance. Also, most timeshares charge a daily use fee. Currently, this fee ranges between $30 and $60 per day of use during your week, but again it depends on the timeshare company and where you stay. This is on top of your original buy-in, as well. If you don’t use your reserved week for some reason, most timeshares still hold you responsible for paying the daily use fee for your week.
Depending on where your timeshare is, you may or may not be able to rent out your week if you’re unable to vacation that year. The subleasing terms depend on your timeshare corporation and on the terms of the resort where the property is located.
Timeshares are often sold under tense, “heavy sell” conditions. They may involve long-term contractual agreements that are often hard to end or transfer. It’s important to make all your financial decisions carefully, including any choice to purchase a timeshare.
Key Differences Between Fractional Ownership and Timeshare
- You own a portion of actual property and land forever, or until you sell
- You’re free to do almost anything with your weeks, including renting them out to gain passive income.
- You’re entitled to take yearly tax deductions according to your number of shares in the property.
- You and your co-owners make all the decisions about the property and land.
- With fractional ownership, you’re paying for a portion of a true real estate asset.
- You don’t truly “own” anything. If the corporation decides to sell the property or end the timeshare contract, your timeshare evaporates.
- Your rights are restricted regarding the personal use or sub-leasing your allocated week.
- You can’t take any tax deductions for your timeshare because you don’t own anything.
- With timeshare, you’re paying for time and use.
- You have no voting power as far as decisions about the property, its condition, repair, and maintenance.
No one else can tell you whether fractional ownership or timeshare is right for you. However, at least now you have a lot of the information you need to make an informed decision. If you’re interested in investing in fractional ownership vacation property in a destination such as Placencia, Belize, or if you have more questions, please contact American Real Estate Investments today. One of our representatives will be happy to answer any questions you may have.