The Basics of Fractional Ownership in Vacation Rentals
You haven’t heard of Fractional Ownership and you’re in the Vacation Rental Industry? That’s okay, we didn’t dabble in that area of the industry either until recently. Fractional Ownership is unique ownership of a vacation rental property that is similar to a timeshare. Don’t let the word timeshare scare you away, keep reading, I promise you they are actually different. Here you will learn the history of fractional ownership, pros, cons, and how your property management software provider can help support you.
Dating back to the 1970s, a revolutionary hospitality phenomenon known as timeshares emerged. Timeshares provide an alternative to full ownership of a place to vacation that includes one to three-bedroom hotel-style suites that would be financially out of reach for full ownership. The fad of timeshares lasted for over three decades when in 2018, 70% of respondents, according to the International Society of Hospitality Consultant’s Annual Survey, said their appeal to timeshares began to fall as home-sharing started to take off. Home-sharing is also what is known as Fractional Ownership (which is what we will call it the rest of this article as well as a product feature of TRACK Property Management Software.)
Entering the 2000’s is when online travel associations (OTA’s), such as Airbnb and VRBO, began to come about and the idea of travelers feeling more comfortable in vacation rentals started to grow. As the demand for vacation rentals started to increase people saw the opportunity to purchase a second home to earn income as a vacation rental. According to HomeAway they suggest the average person who rents out their second home collects about $33,000 annually. That is a good chunk of income for a vacation home that is valued under $1 million considering the costs to operate that home. But, when looking at luxury vacation rentals, that is just a drop in the bucket when operating costs could surpass $150,000 or more annually. What is the solution to that you may ask? Fractional Ownership.
The phrase Fractional Ownership is used to describe shared ownership of a vacation or resort property by people in an arrangement that allocates usage rights based on time. Besides making a luxury vacation rental affordable to middle-income people, let’s take a look at the other pros that come with Fractional Ownership.
Pros of Fractional Ownership
Luxury Vacation Rental Ownership That is Affordable
$6 million is out of the question, but you could afford $1 million? Perfect, if you are able to find 5 other owners with $1 million each willing to put towards a vacation rental, that is where fractional ownership is the answer. This gives you the ability to financially afford an enterprise-level vacation rental, in a high-end neighborhood, to maximize your income by providing it as a top of the line experience to travelers.
The value of your investment is also higher in this situation. When you purchase a portion of a vacation rental, that is your owned property or real estate, these prices will reflect as if you owned in the real estate market vs the timeshare market which is based and commissioned on renting prices.
Less Vacancy, More Love
When looking back on the discussion of timeshares or individually owned vacation rentals, they are more likely to sit vacant for longer periods of time. This can pose an issue if not operating water, air conditioning, heating, and utilizing amenities regularly. Imagine you are a vacation rental owner and do not plan to rent it out, between school, family, and work you are likely to only visit it 3-4 times a year. The benefit of fractional ownership is having up to 12 families utilizing it throughout the 52-week year. There is a higher potential for the vacation rental to be used for closer to 40-48 weeks in a year when you all share ownership.
Tender Love and Care
You may have a luxury home in the ideal location, but every place has room for improvement. Maybe it is upgrading the kitchen cupboards from brown to a white-modern look, or maybe you are attempting to increase your occupancy rate by adding experiences such as mini-golf in the backyard or a pool. These are renovations that would make a large indent in your checkbook, but when you share ownership with a group, you also share expenses with that group making updates, renovations, and add ons affordable and more likely to happen. Going hand and hand with the additional costs of upgrades is the agreement on the renovations between all parties. Send in the list of cons of fractional ownership!
Cons of Fractional Ownership
Decorations and Remodel Decisions
As mentioned, sharing the responsibility of costs with multiple owners gives you more capital to upgrade and decorate your vacation rental. But that can also have a downfall. The more cooks in the kitchen, the harder it is for a decision to be agreed upon and made. If you are getting 6-12 owners, things as little as paint color can make all the difference.
Harder to Sell
Although this does not come close to the difficulty of selling a timeshare, selling your share of fractional ownership can be hard. You will need to verify how the ownership is structured and if there are any restrictions that may apply to the opportunity of selling your share.
If there is not an exit plan in the contract of your fractional ownership, that can also be a roadblock as not everyone will always agree. If you run into this problem, make sure you have financial back up planned to save you from going into debt or worse, being foreclosed on.
Following Rules and Regulations of your HOA
Vacation rentals regulations, laws, and restrictions come in many different forms from regional, to state, all the way down to county level. This could be a factor that plays into the location of your Fractionally Owned Vacation Rental.
The regulations could be as simple as you are required to purchase a short-term vacation rental license or pay a fee to operate a short term rental. There may also be taxes that you pay on income to local, state, and federal. If you are looking closer into your Homeowners Association (HOA) there is a chance they get more granular with parking regulations and noise restrictions.
If you are looking to help advocate for regulations and laws around the vacation rental industry, become a member of the VRMA Advocacy group.
How Your PMS Can Support Fractional Ownership
TRACK Property Management Software is currently in its final beta stages for releasing Fractional Ownership as a feature enhancement to support more enterprise Vacation Rental Management Companies. This feature is the ability to create a fractional ownership group for a property, configure the number of shares, start day of inventory weeks, default blocking reservation type, and the number of weeks out to be scheduled. Multiple owners can be added to the fractional group, assigned a fractional type contract and number of shares.