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

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? 

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

Rental Scenario

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.

The post Fractional Vacation Home Ownership: Is it Worth It? appeared first on Vacation Property Online.

What are the best vacation properties to buy? You may be asking yourself this very question if you are considering purchasing a vacation property. Should you purchase a house with room for the whole family or a condo in the interest of reducing the burden that comes with home ownership? Or perhaps a timeshare to avoid a larger cash outlay? In this article we take a closer look at the most common recreational property types and, in particular, the pros and cons of owning a vacation home, condo, timeshare or other vacation property type.

Best Vacation Properties to Buy: Preliminary Considerations

The first thing you should ask yourself is the reason behind buying a vacation property. Have you always dreamed of owning a vacation property? Having a place to escape the busy city life or a place to pass down to your children? Or are you simply looking to make a savvy real estate investment? Perhaps you are looking at renting out your property short term on Airbnb or VRBO.

The answer to these questions will help determine the appropriate vacation property type for you. For instance, if you’re seeking seclusion then perhaps a remote cabin is the best choice. If, on the other hand, you are looking to use the property only occasionally and otherwise want to rent it out short term, you may wish to buy a turn-key condo. If you are purchasing a vacation property as a lifestyle choice rather than an investment and are fine with limited use then perhaps a timeshare is appropriate.

In short, the motivation behind your purchase is an important factor to consider.

From there, budgetary considerations, owner involvement and other matters described below need to be taken into account.

Vacation Home: King of the Castle

When considering the best vacation properties to buy, the analysis should begin with a vacation home. As a homeowner in Canada or the United States, you not only own the house but also the land on which the house is situated. As “king of the castle” you are not subject to the same restrictions that come with owning a condo or other strata property. But owning a home also comes at a cost. Some of the pros and cons of owning a vacation home include:

Pros

• More space/privacy
• Unique compared to a condo
• More customizable through personal design touches

Cons

• Higher purchase price (see how far your dollar goes across Canada here)
• Higher maintenance and utilities costs
• Tougher to rent out short term

Bonus: annoy your friends by referring to your vacation home as a chalet, villa, compound or other pretentious description to show what a big deal you are!

Vacation Condo: Anything You Can Do I Can Do Better

As an owner of a condo, you own the interior space of your unit whereas common areas and outdoor spaces are owned in common with the other owners in your building. Monthly strata fees will cover the general expenses of the strata and in some cases special assessments will be levied when major repairs to the common areas and building exterior are required. If the strata is well run, owning a condo can be a lot less work and responsibility. Some of the pros and cons of owning a vacation condo include:

Pros

• Lower purchase price compared to a house
• Lower maintenance costs
• Amenities on site
• Easier to rent out short term
• Better security

Cons

• Less space/privacy
• Less control
• Strata by-laws may restrict use

Bonus: if you buy a top floor unit you can brag to all your friends that you own a penthouse 😉

Timeshare: It’s a Lifestyle Choice

With a timeshare, you own a portion of a vacation property that you can use on a limited basis, usually once a year.

Depending upon the type of timeshare (fixed week, floating etc.), your usage rights may vary slightly. For these reasons, a timeshare is more of a lifestyle purchase than an investment. No matter the type of timeshare, be sure to take some time before completing a purchase, as buying a timeshare can often be an emotional decision. What seemed like a great idea following the consumption of five margaritas may turn into a feeling of regret. Some of the pros and cons of owning a timeshare include:

Pros:

• Less responsibility
• Affordable (pay for use model)
• Certainty as to where and when to take your vacation

Cons:

• Annual fees
• No control over the property
• Difficult to resell

Bonus: a free meal likely awaits anyone willing to suffer through attend a timeshare sales presentation!

Other Vacation Property Types

• Townhouse/Duplex – if you’re looking for the conveniences of a condo but with more space and privacy then this may be a good option. You’ll also have your own private entrance without the need for an elevator typically seen in condo towers. Unlike a house, however, you won’t have any physical separation from your neighbors and will typically have a smaller yard, if any.
• Fractional Ownership – fractional ownership involves several buyers that each holds an equal part of the title. This differs from timeshares where property title is 100% owned by the principal owner. With fractional ownership you are also often allowed to use the property for a longer period of time than timeshares. For these reasons, fractional ownership is a legitimate investment with opportunity to see an increase in the value of your fractional ownership over time.
• Water Access Only – the obvious benefit to water access only property is privacy, yet remoteness and inaccessibility may deter many buyers. Simple conveniences like restaurants and grocery stores may be difficult to access. Such properties may also be inaccessible by first responders in the case of an emergency.
• Leasehold – a buyer of leasehold property will have an exclusive right to occupy the property for a specified period, in some cases up to 99 years or more. At the end of the lease, the right to occupy the property reverts to the owner.

Other things to consider

• Are you particularly handy? If not, you may want to steer clear of buying an older home.
• How much time do you have to devote to care and maintenance? If you do not want to be very hands on then you should consider buying a newer condo or hiring a property management company.
• How accessible is the property? If its further than a two hour drive, do you have someone locally that can assist in the case of an emergency?
• Have you visited the location you’re interested in? If not, a lot of insight can be gained by renting a comparable property in the area before taking the plunge and completing a purchase.
• Do your due diligence no matter what type of recreational property you are purchasing. A complete home inspection will be important when purchasing a home and reviewing the strata by-laws and recent minutes will be important when purchasing a condo. For timeshares, be sure to read all of the relevant documentation to understand exactly what you’re buying into.

Conclusion

Purchasing a vacation property is the realization of a lifelong dream for many. Depending upon the type of property, it’s also a significant financial undertaking and time commitment. Before making any such purchase, be sure to consider the motivation for your purchase, your budget, your ability and willingness to handle maintenance and the other items noted above.

So what are the best vacation properties to buy? If this article has shown anything, it’s that there are many questions and other considerations that need to be taken into account. Many of us at Vacation Property Online wrestled with these very questions before taking the plunge. After having asked these questions, completed our due diligence and made the purchase, we can assure you that it has been a very rewarding experience. Happy hunting!

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