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    Should You Buy a Property Even If It's 'Fractional Ownership'?

    Understanding the benefits and risks behind this type of real estate investment

    Written By Robert Van Rhijn

    If you want to invest in real estate, but can’t afford the 20% down payment — there are still several ways to get into the market.

    For example, there are real estate investment trusts, also known as REITs. These are usually publicly-traded companies that have a bundle of income-producing properties in which you buy shares. They’re often used like stocks or bonds to diversify an investment portfolio.

    But if you’ve been scrolling through listings — as one does when they dream of home ownership — you may have come across a nice-looking condo with an unusually low asking price that mentions ‘fractional ownership’.

    These types of listings are cropping up more frequently as this form of real estate investing becomes increasingly popular.

    So what is fractional ownership, and is it right for you?

    “Properties, such as a detached house or a condo, can legally be owned under a corporation,” explains realtor Osman Omaid.

    “Fractional ownership gives you a fractional share of the corporation, which owns one single property. Just like how you can buy, own, or sell shares from Apple and Tesla as corporations, you can also own a share in a corporation, which happens to own a property.”

    Depending on the company, buying into a fractional ownership can start as low as a $50-per-year subscription, where you can invest as little as $1 into a property share.

    But to be clear, fractional ownership isn’t like a timeshare, or co-ownership. You are not allowed to live in or use the property. What you do get though is some type of return on your investment.

    “Every fractional ownership agreement can have different stipulations on how ROI is given back to the shareholders,” says Omaid.

    For example, some companies offer a percentage of rental income relative to your investment. And when a property is sold, the appreciation is paid back to investors, who also get back their investment principal.

    Similarly, there are companies that sell shares in someone’s downpayment, then pays out the proportion of appreciation back to investors. And that’s in addition to the investors’ initial contribution when the home is sold or refinanced.

    “You’re able to reap the benefits of an appreciating property without the large capital downpayment or the monthly mortgage payment commitments,” explains Omaid.

    You’re also off the hook in paying for home expenses, maintenance, renovations, or dealing with tenants and rental arrears.

    However, fractional ownership is not without risk.

    “The danger of fractional ownership is that your investment return is heavily dependent on the appreciation of the real estate market,” says Omaid, who warns that property values don’t always appreciate.

    “This is also a new method of real estate investment, so there are no large scale examples or case studies to examine. The drawbacks are that the decisions, responsibilities, and liabilities are case-by-case dependent. It’s not exactly clear how issues or disagreements would be mediated.”

    Additionally, the investment is not as liquid as a REIT or regular share in a company. In many instances, you can’t take your money out until the homeowner actually sells or refinances.

    So is fractional ownership a good idea? Short answer: Depends.

    If you’re looking for a way to earn passive income or diversify your investments, it could be worth further consideration. But if you’re looking for a traditional roof over your head, or a home for your family — fractional ownership isn’t going to give you that.

    Starting your search for a new home? Click on any of these links to access active listings, sold listings or contact a Strata agent.

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