Vacation Property Online

North America’s vacation property resource

  • Home
  • Vacation Home Blog
    • Buying a Vacation Home
    • Selling a Vacation Home
    • Owning a Vacation Home
  • Vacation Home Resources
    • Canadian Vacation Spots | Featured Markets
    • Vacation Property Prices Canada
    • Calculators
  • Listings
    • Recreational Property for Sale in BC
      • Recreational Property for Sale Okanagan BC
      • Recreational Property for Sale Vancouver Island
  • Illustrative Price Map
    • What $500K Buys in Canada
    • What $750K Buys in Canada
    • What $1M Buys in Canada
    • What $1M+ Buys in Canada
  • About Us
  • Contact
Vacation Property Online

North America’s vacation property resource

  • Home
  • Vacation Home Blog
    • Buying a Vacation Home
    • Selling a Vacation Home
    • Owning a Vacation Home
  • Vacation Home Resources
    • Canadian Vacation Spots | Featured Markets
    • Vacation Property Prices Canada
    • Calculators
  • Listings
    • Recreational Property for Sale in BC
      • Recreational Property for Sale Okanagan BC
      • Recreational Property for Sale Vancouver Island
  • Illustrative Price Map
    • What $500K Buys in Canada
    • What $750K Buys in Canada
    • What $1M Buys in Canada
    • What $1M+ Buys in Canada
  • About Us
  • Contact

Articles

fractional vacation home ownership is it worth it

Fractional Vacation Home Ownership: Is it Worth It?

By

Vacation Property Online

Posted in Buying a Vacation Home On December 18, 2021

Fractional vacation home ownership presents a more affordable way to own a vacation property with less stress and responsibility. Fractional ownership also provides you with a more passive way to own a property since multiple people own it and someone else takes care of the property. Whether it’s the sunny seashores of Montage Kapalua in Maui, the picturesque Whiteface Lodge in Lake Placid, NY or snowy escape of Solara in Canmore, Alberta, there are no shortage of fractional vacation home ownership opportunities. 

While there are different meanings of the term “fractional vacation home ownership”, in simple terms such ownership involves several buyers each holding an equal part of title to the vacation property. Fractional vacation home ownership differs from a timeshare in that with fractional ownership you own real estate whereas with a timeshare you have a right to use a property.

There are certainly drawbacks with owning a property with other people because there’s more than one opinion or voice in any decisions pertaining to the property. Yet for many people, the benefits outweigh the drawbacks. With this in mind, let’s take a closer look at whether it’s worth it to buy a fractional vacation home. 

What you Should Know Before Considering Fractional Vacation Home Ownership

fractional vacation home ownership what to know beforehand

Owning a fractional vacation property comes with some unique considerations. Knowing what you should consider before you jump in headfirst into a shared vacation home is important. Here are some things you should think about.

Understand What you Own

Before you buy into fractional homeownership, consider what you own. Is it a traditional ski resort model where you buy a quarter interest and get a quarter use of the property? In this case, you own part of the property, giving you ownership rights, like you would have if you owned a home.

Other ownership models like those of certain private residence clubs give you rights to the club amenities and services, but you don’t have any ownership rights to the property itself.

Rights and Liabilities

Before you buy a shared vacation home, understand the rights and liabilities you’ll have or incur. Do you have pre-determined usage rights where you get to use the property for a portion of the year or is it a pay-for-use situation where you pay for the time you use the property, as do your co-owners?

As far as liabilities or responsibilities, consider:

  • Who manages the property?
  • Who makes decisions on how the property is handled, renovated, etc.?
  • Who pays the expenses? How are they divided?

To get a more detailed understanding of what a property allows/requires, read the organizational documents, including any co-ownership agreements.

Annual Costs

In shared ownership arrangements you pay the proportion of the ownership. For example, if you have 25% ownership, you pay 25% of the expenses. In a pay-for-use approach, you are responsible for usage fees, which come out of your rental income. If your usage fees exceed your portion of the rental income, you’d owe the difference. 

Annual fees typically cover all maintenance costs and reserve requirements to cover the cost of any future updates or renovations.

Financing

It’s often much harder to get financing for fractional vacation ownership. If you can find a lender, you’ll likely have to meet strict requirements and have a large down payment. For this reason, it’s often best to invest in fractional homeownership when you can pay for your portion in cash.

Selling the Property

Owning a property with others means you often can’t decide to sell the property without their consent. In most cases, all parties must be on board. Your organizational documents may prohibit the sale of one partner’s ownership without the consent of every owner. In such circumstances, the only way you may get out of it is by selling to another co-owner.

Is Fractional Vacation Home Ownership Worth it? 

fractional vacation home ownership buy or rent

In order to answer this question, let’s take a closer look at renting vs owning a fractional vacation home and whether owning one is a good investment.

Renting vs Owning

When you own a fractional vacation home, you only have rights to it for a part of the year. For this reason, you may be asking yourself whether it would be better to rent a vacation home instead of own a fraction of a vacation home? So let’s consider an example. Let’s say a ski chalet in your favorite winter destination has recently come on the market for $40,000. For the purchase price, you will receive a ¼ interest and four weeks of personal use per year. Annual fees are $1,000 per year, increasing with inflation at approximately 3.0% annually. Let’s also assume that the value of the property appreciates in line with historical norms at 4.0% annually. Instead of buying a fractional interest, you could rent a comparable unit for $200 per night. Under the rental scenario, let’s also assume that rental rates increase with inflation at 3.0% annually and instead of investing $40,000 in real estate you invest in the stock market, realizing an annual return of 8.0% per year (slightly below historical norms). Here’s what these scenarios look like after 10, 20 and 30 years:

Ownership Scenario
After 10 YearsAfter 20 YearsAfter 30 years
Value of Fractional Interest$56,932$84,274$124,746
Less Total Costs$11,464$26,870$47,575
Net Worth/Deficit+$45,468+$57,404+$77,171
Rental Scenario
After 10 YearsAfter 20 YearsAfter 30 years
Value of Stock Market Investment$79,960$172,628$372,691
Less Total Rental Payments$64,198$150,474$266,422
Net Worth/Deficit+$15,762+$22,154+$106,269

Using the above scenarios, there doesn’t appear to be a clear winner. In the ownership scenario, you would be further ahead in years 10 and 20 but that changes in year 30 where renting appears to make more sense. Of course, the above scenarios are an oversimplification of the actual calculations and there are various assumptions that could prove to be incorrect. By going through this exercise, however, the answer may be clearer depending upon your circumstances. 

Do Fractional Vacation Homes Make Good Investments

You have many options to invest your money, so is a shared vacation home a good way to use your money? Like any savvy investor, a diversified portfolio is a good idea – it prevents a significant loss should one asset decline in value. But does it make sense to add fractional vacation home ownership to your investment portfolio? Here are some things to keep in mind:

  • You only own a fractional interest in real estate, so you will feel less of an impact with the ups and downs of the market. Historically, though, the stock market outperforms real estate. Real estate only slightly beats inflation, whereas stocks have an average annual return of 9% – 10%. But comparing real estate to stocks is in many ways an apples to oranges comparison. Therefore the best situation is to invest in both – diversifying your portfolio.
  • If your property is a part of a rental pool, focus on the net proceeds. How much will you walk away with after annual maintenance costs and other required fees? While the rent you bring in may look attractive, the annual carrying costs can pile up quickly. 
  • Fractional interests are hard to liquidate. When you invest in stocks or bonds, you can sell them on the open market. When you want to liquidate a real estate investment that you own with others, you often must get their approval. For this reason, there are typically less interested buyers. Given shifting consumer preferences towards fractional ownership, however, that may be changing.

To determine what your rate of return might be based on various input scenarios, try our Real Estate ROI Calculator. 

Final Thoughts

If you are clear on the ownership rights and limitations, owning a shared vacation home can be well worth it. The pride of ownership and enjoyment of the property may outweigh the drawbacks, including the lack of control over decision making and the difficulty in reselling your fractional interest.

If you’re buying the property for investment purposes, you may have other (better) options including renting a comparable property versus owning it. The annual costs, for instance, can be quite high. Yet, investing in real estate is often a wise decision and there are benefits to buying a fractional interest, including being less exposed to market price fluctuations.


 Buying a Vacation Rental Property, First Time Home Buyer Vacation Home, Second Home Finances, Timeshare, Vacation Home FAQs, Vacation Property Investment

Recent Posts

  • Using Retirement Funds to Buy a Second Home: What You Need to Know
  • Best Place to Buy a Beach House in Florida: Our Top Six
  • Should I Buy a Vacation Home? Suitability, Finances and More
  • Vacation Home Loans: Everything You Need to Know About Your Financing Alternatives
  • Buying a Vacation Property or “Second Home” That Will Be Your Primary Residence: Important Considerations

Categories

  • Buying a Vacation Home
  • Owning a Vacation Home
  • Selling a Vacation Home
Vacation Property Online

/North America's Vacation Property Resource

Join our Mailing List

  • Home
  • Vacation Home Blog
  • Resources
  • Illustrative Price Map
  • About Us
  • Contact
  • Terms of Use

Tags

Best Places to Buy a Vacation Home Buying a Cabin Buying a Cottage Buying a Vacation Home in Canada Buying a Vacation Rental Property Buying Waterfront Property First Time Home Buyer Vacation Home How to Guides Owning a Cabin Owning a Cottage Owning a Vacation Rental Property Rankings and Lists Recreational Property Second Home Affordability Second Home Finances Selling a Cottage Timeshare Vacation Condo Vacation Home Decor Vacation Home FAQs Vacation Home Financing Vacation Home Mortgages Vacation Home Pros and Cons Vacation Home Rules Vacation Home Statistics Vacation House Vacation Property Investment Vacation Rental Property Investment

© 2019-2022. All rights reserved.

|

Designed by Image Fatale Agency

Owning a home is a keystone of wealth… both financial affluence and emotional security.

Suze Orman
December 10, 2022 Saturday!
Vacation Property Online
  • Login
  • Register
Forget Password?