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You may dream of owning vacation property tucked away in the mountains or on a white-sand beach, but let’s face it: A second home may not be in your budget.
Fractional ownership properties and timeshares are two options for co-owning a vacation home with multiple other parties. Each gives you usage rights for a specific period each year. And in both cases, the up-front costs and day-to-day expenses are substantially lower than you’d pay if you bought an entire property on your own because you split them with other owners.
There are some key differences to be aware of if you’re considering one of these vacation ownership structures. In this article, we’ll cover the similarities and differences between fractional ownership and timeshare ownership and dive into the pros and cons of each.
Fractional ownership is a real estate investment in which multiple individuals each own a share of a property, often a high-end vacation home. Each owner receives a deed that represents their ownership stake. For instance, if a $500,000 luxury vacation home was divided into 10 equal shares, with each person paying $50,000, each owner would receive a deed conveying 1/10 ownership. Generally, each owner can sell their share at any time.
The fractional ownership model can be relatively informal. For instance, if you and three friends decided to buy property together and co-own it as joint tenants in common, with each person owning a 25% share, you’d be a fractional real estate owner.
However, many fractional properties are what’s known as private residence clubs or destination clubs. Essentially, a legal entity like a limited liability company or a limited partnership buys a high-end vacation property, splits it into fractional shares and sells them.
These properties typically have a dozen or fewer owners, each of whom typically has usage rights for several weeks per year. The co-owners share decision-making about the property; however, they usually hire a property management company to handle issues like upkeep and repairs.
Yahoo Finance tip: Several startups like Arrive and Lofty AI allow you to invest as little as $50 to $100 to become a fractional owner of single-family and vacation homes. You can earn rental income from these investments, but you won’t get usage rights.
A timeshare is a real estate structure where a developer sells the rights to use a vacation property or condominium to multiple people, with each owner typically getting a week or two of access each year. Each owner pays annual maintenance fees to cover ongoing expenses.
The difference between a timeshare and fractional ownership can get a bit fuzzy, but timeshares tend to be cheaper than fractional vacation properties and have significantly more owners.
People often wind up buying into these vacation arrangements after attending a “timeshare pitch” on vacation. Basically, in exchange for freebies like excursion credits or dining vouchers, you sit through a sales presentation that often includes high-pressure tactics.
There are two basic types of timeshare ownership:
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Shared deeded ownership: Buyers get a deed that represents their proportional ownership share. So if you bought the right to use the property for one week per year, you’d get a deed that conveys a 1/52 ownership stake.
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Shared leased ownership: Buyers get the right to use the property for a specified period each year, but they don’t get a deed for the property. The timeshare developer continues to hold the deed.
Timeshare rules have many variations. Depending on the resort, you may have the right to stay on the property for a fixed rate (stays the same from year to year) or a floating week (allows you to change weeks from year to year). Some timeshare resorts operated by hospitality chains use a system that awards owners points that they can use to stay at other properties within their network.
Fractional ownerships and traditional timeshares each offer forms of vacation ownership that are more affordable because multiple parties split the costs. Depending on the property, co-ownership may also include desirable amenities, like beach access, golf, tennis, and fine dining. However, there are a few key differences prospective property owners should know.
If you’re considering investing money in a recurring vacation experience, here are some pros and cons of fractional ownership and timeshares to consider:
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You can afford a luxury property. Because you’re splitting the costs of ownership, management, and maintenance, you may be able to afford a property that would otherwise be out of reach.
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You get more access to the property. Fractional properties generally have fewer owners than timeshares, which translates to more time each year in your vacation residence.
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Values tend to increase over time. A fractional property’s value isn’t guaranteed to increase, but like other real estate, values usually appreciate in the long term. Be sure to assess local market conditions, as well as your financial circumstances before you buy.
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Deeded property without the hassles of owning an entire home. Because a management company usually handles issues like maintenance and upkeep, you can enjoy a vacation property without the headaches that often accompany home ownership.
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More expensive than timeshares. Because you’re sharing costs with fewer owners than you would with a timeshare, you can expect to pay more upfront for fractional ownership than you would for a timeshare.
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Getting financing can be difficult. Many banks and credit unions won’t give you a mortgage on a fractional property.
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You’re locked into a single property. Fractional ownership doesn’t allow you to change up your destination if you want to vacation somewhere else.
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Cheaper than a fractional property. Since timeshares typically have many more owners, they tend to be cheaper than fractional properties.
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Potential to access other locations. If you buy a timeshare through a hospitality company that has a points system, you may be able to use your points to stay at other properties.
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May offer long-term savings if you like to vacation in the same place. The average cost of a timeshare was nearly $24,000 in 2022, while average annual fees clocked in at $1,120. However, if there’s a destination where you love to vacation, paying these expenses could help you save money in the long term, particularly if you want to lock in a specific week or two each year.
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Not an investment. If you’re hoping to turn a profit, fractional ownership is a better investment than a timeshare because timeshares typically lose value. Think of purchasing a timeshare as buying a vacation experience, rather than an investment.
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Less access to/control over property. Timeshare owners typically only get to stay on the property for a week or two. They also exert little control over the property, as the developer or resort typically makes management decisions.
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Difficult to resell. Timeshares are notoriously difficult to resell due to developer rules and the abundance of units typically on the market. Many owners resort to timeshare exit companies, some of which are scams.
Is fractional ownership better than a timeshare?
A timeshare is typically cheaper than a vacation property that’s divided into shares. However, because timeshare properties tend to depreciate over time, they shouldn’t be considered an investment. Getting out of a timeshare contract can be extremely difficult. Fractional ownership is typically better if you can afford higher upfront costs and want to invest in part of a property. But timeshare ownership could make sense if you simply want recurring access to a vacation spot at a lower cost and aren’t concerned about the resale value.
Why do timeshares have a bad reputation?
Timeshares are often the subject of complaints because of the high-pressure sales tactics often deployed during timeshare pitches, as well as the fees and the difficulty associated with timeshare exits.
What are the disadvantages of fractional ownership?
Some drawbacks of fractional ownership include the higher up-front and ongoing costs, along with the fact that you’re usually locked into a single property.