Unlike a timeshare, in which you are buying only a share of the time available for the usage of the asset, with a fractional interest you are in fact sharing in the ownership of the asset.
This model was first established, not with vacation properties, but with business jets. However, it has also come to be used with sports cars, yachts and motorhomes.
The benefits of fractional ownership, versus simply renting the asset, continue to be debated, especially since different jurisdictions apply different tax laws that may or may not allow capital loss allowances and may be more favourable to renting versus owning.
But for the purposes of this article, let’s focus on property and what’s typical in Canada.
Owning a partial interest in a property will allow you to have an equity position in that property that you might otherwise not be able to afford.
For example, a recreation property that would sell outright for $600,000 may be divided into partial interests – say four. However, bear in mind that each unit is likely to be sold at a premium that is greater than 25 per cent of the property’s overall value.
Ownership comes with rights and responsibilities.
You will have the right of use, and in the case of a 25-per-cent share, for three months of the year, with the times predetermined. If the times available suit your anticipated future vacation needs, this may be the right thing for you.
Ownership is not carefree
Responsibilities that come with a shared ownership will be similar to owning a condominium with monthly maintenance fees, which will depend on the level of services offered. Fractional interest arrangements for properties are often packaged with on-site amenities such as maid service, groundskeeping, maintenance and sometimes a concierge.
These services will come at a price which will include the need to be involved with the overall management of the project where your unit is located, in partnership with the other owners.
Joint ownership and management of property has become common in Canada, most typically with condominiums, but you need to recognize that this is not carefree ownership. You will need to be involved with the decision-making process and aware of the reserve fund required to keep the property in good condition.
Shared ownership through fractional interest properties can be superior to shared ownership, such as the scenario where siblings jointly own a family cottage. The big difference is that the time when you may use the property is predetermined and not subject to the whims of a difficult sibling.
However, your use is restricted in that the furnishings are common and you have to be prepared for the occasional hassle of sharing a living space with others.
Biggest winner always the developer
Buying a fractional interest has the advantage of allowing you to live in a very attractive and well-serviced recreational property at a fraction of the cost of owning it outright. However, it is worthwhile to remember that the biggest winner in the project will be the developer.
By offering a property as a fractional interest unit, the developer gets to sell a unit several times, with each unit likely selling new at a premium over and above the current market value if the unit were to be sold as a single ownership unit.
As long as you go in with your eyes wide open and know what you are getting into, you should be fine.
Some day you will want to sell
Your eventual exit from the property must also be taken into account when you buy. As I noted in a previous article, we all have to sell sooner or later, so plan ahead and make sure you understand the exit strategy.
What was attractive to you when you bought your share of a new unit may not be as attractive to the resale market 20 years later.
Buying and owning real estate is almost always a good idea but make sure you’re going to get value for money and have a plan on how to get your money back out when you want to.
To discuss this or any other valuation topic in the context of your property, please contact me at email@example.com. I am also interested in your feedback and suggestions for future articles.