Author Topic: Fractional Ownership? Does Anyone Have Any Experience With This?  (Read 12209 times)

ltt

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Am looking into the future.  Possibly 5 years or so down the road--my husband would like to retire around then if at all possible.  We have over $1M net worth ($800K+ in CDs/stocks/401k/savings, $200K in home).  I would like to find somewhere warm to go in the wintertime--possibly Hawaii for a few months out of the year. 

Is fractional ownership worth doing on one of the islands?  Not necessarily a timeshare, but an ownership split among 5 or 6 owners, and then there is an allocated period of time (2 months or so).

Pros, cons, not worth it, etc.??

dragoncar

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #1 on: July 26, 2014, 07:21:18 PM »
Almost never a good idea, but try buying one on the secondary market perhaps.

ltt

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #2 on: July 26, 2014, 07:27:26 PM »
Almost never a good idea, but try buying one on the secondary market perhaps.

Can you elaborate as to why??

totoro

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #3 on: July 26, 2014, 07:43:45 PM »
Timeshares are terrible imo, but I've always thought fractional ownership among a group could work out very well as, imo, this is an underutilized strategy in high value areas. 

Let's say you could buy a desirable $500,000 property - or less than $100,000 each.  Your maintenance costs are split and you can have an agreement to permit vacation rentals (where allowed) if any party cannot attend during their period of time.   

One thing to think about though is whether for two months of the year it would end up being less than the lost opportunity costs if you pay cash than it would be to just rent a place. 

The great thing about fractionals is that you own the land and building, not just the right to use it.  This means you benefit from appreciation over time as well and you can sell your share.

Biggest thing with a fractional is an excellent, detailed agreement with very specific dispute resolution procedures.  One of the biggest risks imo is disputes among the co-owners.

ltt

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #4 on: July 26, 2014, 07:47:40 PM »
Biggest thing with a fractional is an excellent, detailed agreement with very specific dispute resolution procedures.  One of the biggest risks imo is disputes among the co-owners.

Yes, this would be a concern.  Do banks lend money for this type of ownership??

totoro

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #5 on: July 26, 2014, 08:54:57 PM »
You can in Canada and I believe it would be easier to get a "mixer mortgage" as you'd have higher income/credit with more parties: http://www.cbc.ca/news/canada/british-columbia/mixer-mortgages-make-vancouver-home-ownership-possible-1.2514737

clifp

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #6 on: July 26, 2014, 10:15:56 PM »
While there are tons of timeshares, in Hawaii. I don't know of anybody having a 1/4 to 1/6 fractional ownership.  I think it would be an unwelding partnership and be very illiquid.  How does a person sell their interest?  How about if  1/2 or more want to sell?  You can pick up timeshares on the secondary market, and at times there are good deals.  I know they literally were giving away timeshares for places in Vegas and Florida during the crisis. People didn't want to pay the maintenance fee. Hawaii timeshare never got that cheap but on the secondary market they are a lot cheaper than buying them directly.

If you are planning on joining the flock of snowbirds who winter in Hawaii, my suggestion is to look for a long term rental, I think it would be cheaper in the long run (although certainly not cheap) than either a time share or your part ownership scheme.  In most places in Oahu and I believe also in Maui you are not allowed to rent out a place more than once every 30 days.  Although the rule is frequently broken, it gives people a big incentive to provide a price break for longer rentals. So a typical VBRO or AirBnB walking distance to a beach in Hawaii might be $4,000 for a week but only $10K for a month and perhaps $20K for 3 months.  Since legally they could only rent it 3 times during those 3 months that are actually doing better by only collecting $20K.  Now a place like this is going to run well over a $1 million.   So that means you are going to have to come up with 200-400K depending on how many partners.  HOA/condo fees, taxes, insurance, plus paying a property manager to look out for it when it is empty will probably cost you another $1K/month.  Plus you aren't tied down to a specific property and/or a specific time of year. 

totoro

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #7 on: July 26, 2014, 11:02:20 PM »
It may or may not be illiquid.  I'm not sure.  A fractional share can be sold to a qualifying third party and financing is possible, although there may be a marketing issue.  Ski condos and rec cabins might be good candidAtes for a group of friends.  I would consider doing this for an already inexpensive place to have a regular family vacation spot nearby at a very low cost.  Paying 1000 a month for property management would be a poor decision in any case.

clifp

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #8 on: July 27, 2014, 04:19:14 AM »
It may or may not be illiquid.  I'm not sure.  A fractional share can be sold to a qualifying third party and financing is possible, although there may be a marketing issue.  Ski condos and rec cabins might be good candidAtes for a group of friends.  I would consider doing this for an already inexpensive place to have a regular family vacation spot nearby at a very low cost.  Paying 1000 a month for property management would be a poor decision in any case.

It isn't all property management.  The typical fees condo fees or homeowner association fee are in the 500-800/month,throwing in taxes (2-3K) and insurance along with property manager push the figure to the 1k range.  I think it would be difficult to sell a fractional property, in something that wasn't a normal timeshare.  The market isn't very large and there isn't a establish secondary market for them.

totoro

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #9 on: July 27, 2014, 11:43:29 AM »
Well, a quick google search shows that there are already a boatload of fractionals in Hawaii and it appears the resale market is active. For example:

http://www.hawaiilife.com/articles/2011/05/fractional-shares-for-sale/
http://www.hawaii-property.com/property-search.php?propertytype&virtualtoursonlyH=false&imagesonlyH=false&openhouseonlyH=false&zone=0&subdivision&zip&pricemin=0&pricemax=0&tenure=All&timeshare=Only&bedroomsmin=-1&bedroomsmax=-1&bathroomsmin=0&bathroomsmax=0&livingareamin=0&livingareamax=0&acresmin=0&acresmax=0&listingfilter&propertyage=AnyAge&scenicview&pool=Include&oceanfront=Include&keywords&Search&layout=grid&section=fractional

On the first example the costs per year for maintenance/utilities excluding electricity are $2200 per year (about what you estimated when looking at the monthly cost over two months).  At $147,000 buy-in and $2200 a year, assuming you finance, you are spending just over $10,000 a year for the two months.  Of the $10,000, approximately $3000 goes to the principal, so we can assume about $7000 a year as the net cost if you hold it for at least seven years (including selling costs and managing the risk of depreciation).

Then you need to look at appreciation/depreciation.  I we assume 4% appreciation per year averaged over 7 years that is about $6000 a year.  That is a big assumption, particularly over the short-term and you could, instead, experience depreciation.  Time and location mitigates this risk to a great degree but
published studies generally indicate that fractional interests in properties that generate significant
income tend to sell for a below average price discount.  In addition, interest rates could rise somewhere along the line.

Now what if you only went one of the months and rented it out for the other 30 days?  Let's say you get $7000 for the 30-day rental and that you net $5000.

Total costs of are about $10,00.  Total revenue is $5000, appreciation is $6000 and principal paydown is $3000.  You are ahead by $4000 a year and you have the $7000 benefit of staying there.

http://www.willamette.com/insights_journal/10/summer_2010_12.pdf

My view is that you can create your own fractional and do much better than those that are part of a developer scheme.   

You could build in all sorts of clauses that cover circumstances related to fractionals such as lack of liquidity.  You could, for example, stipulate that after seven years a co-owner can compel a sale at market rate of the whole if the average appreciation has been at least 4% a year and a sale of the whole would result in a share value that is at least 15% higher than if sold fractionally.

totoro

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #10 on: July 27, 2014, 12:12:02 PM »
I missed that a PT cruiser was included in the fractional.

As it turns out that particular example of a fractional could be operated as a popular vacation rental: http://www.vrbo.com/480444

The rental rate is $165 - $215 a night so you would not be getting $7000 a month.  Maybe $4000 in a popular month which might net you $3000 so you'd need to adjust the figures down.

The_Learning1

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #11 on: July 30, 2014, 08:02:48 AM »
I have a slightly different perspective on fractional ownership because I work in a tourist area with a hurricane season.  Fractional ownership is extremely well-regarded by the industry and tourism promoters for a reason that I think demonstrates its fundamental failing as an investment.  In my area, the political consensus has grown strongly in favor of promoting fractional ownership to tourists for the simple reason that fractional ownership locks people into returning here, year after year.  (And I can hear the time-share promoters already preparing their responses now: "time shares are flexible, you can exchange them for other properties elsewhere, etc. etc..")  But the bottom line for the developer is that once the new "owner" has signed on the dotted line, he or she has committed to filling a room or an apartment of the developer's hotel from here to eternity, for an extremely limited upside (if any) and an endless (although admittedly low level) downside (fees, maintenance, etc.).  Of course it's a great deal for developers.  They tell me it "smooths" out industry downturns (because even if the national economy is horrible, the "use-it-or-lose-it" nature of time shares makes people return whether they want to or not -- or even can afford to or not); it minimizes the impact of hurricanes on tourist revenue (no matter how bad the town looks after a hurricane, people will come back to use their time share time so as not to lose it); and finally, time-shares turn time-share owners into self-interested promoters (or shills) of the areas they've "invested" in (because once you're in, you're in -- so you might as well build up the area.) 

For all of these reasons time-share salespeople are paid exceptionally well, short-term rewards to time share "investors" (like a new car on signing, etc..) are exceptionally "generous", and there are so many "free lunches" offered to potential time-share buyers. 

As my mother always said, there's no such thing as a free lunch.  Getting past the numbers argument for fractional ownership -- which never really works when one factors in the long term -- the very fact that the tourism industry wants to lock you into returning year-after-year to some product the developer controls should itself be the warning sign.  Why should you as an "investor" sign up to stay at the same hotel year after year until you're old and gray, when in fact the developer commits to very little?  I'd recommend renting every year.  You will save money, save hassle, and avoid having to rent in years when you are ill, bored with the place you're considering, or don't want to fly through a hurricane to get there.

totoro

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Re: Fractional Ownership? Does Anyone Have Any Experience With This?
« Reply #12 on: July 30, 2014, 10:11:00 AM »
You do realize that fractional ownership and timeshares are different right?  You are using the terms interchangeably when they are not.   

A timeshare conveys the right to use and occupy a resort, or a number of resorts, for a set period of time during the year.  There is no ownership of the underlying asset. 

The market value of a time share is often close to zero because of high maintenance fees which make renting better value and more flexible than owning  time share.  You don't benefit from any appreciation of the underlying asset. 

Fractional ownership could be self managed - you don't need a developer to set it up.  It is, essentially, co-ownership.  You own the land and building on a percentage basis.  Your agreement can state that, after a period of time, the whole must be sold if the market value of the share does not match the value that could be obtained from the sale of the whole.  Ie. you can address any illiquidity in a number of ways.

A group of friends could set up a fractional ownership in a ski condo, for example.  In my area you can buy one that sleeps six at the base of the hill for about $100 000.  Between four this is $25,000 each.  Monthly costs are about $200 and repair and replacements could be $1200 a year or so. So for, say ten years, you could have 4 weeks to use or rent out the condo.  It rents for $1200 a week in season which pays for expenses and a bit more.  At the end of the time, say when all the kids are older, you can resell.   

After ten years you would at least get back your initial investment, and perhaps appreciation of est. 4% per year. 

You would have had the value of 3 weeks a year at the ski hill in season for you and/or friends and family for a cost of approx. $1200 lost opportunity cost on the $25,000, which might be mitigated by the appreciation or by renting out another week a year.   

Where I live there are also off-season rentals for those who enjoy nature/mountain biking so that might add to the income potential.  Off season use would add another 8 weeks of time in the condo.

You could do the same thing with a cottage anywhere.

The key to a fractional is a good agreement.

 

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