When most people first hear of the idea of fractional ownership, they immediately think of time-shares and figuratively “run for the hills”. The reason will be discussed shortly.
Although timeshares do share some similar characteristics, this is a different topic completely. With a timeshare, you typically get access to the property one to two weeks per year and it’s divided between a large numbers of people. With fractional ownership, you could potentially get 13 weeks or more of the year.
I do believe that a negative attitude toward timeshare is not justified; I live in the Caribbean so I have a lot of close friends that work in Timeshare for a living and they are one of the hardest working people I’ve ever known. It’s just very different and I personally aim for my clients to feel that they are not only getting a fun place to have drinks at, but that they are investing in themselves and their future.
So What’s the Difference Between Fractional Ownership and Timeshare?
The main difference between fractional ownership and a timeshare is in the way actual equity is distributed. In a fractional ownership arrangement, the purchaser actually owns a piece of equity in the property. If the property goes up in value, the fractional owner’s share of the pie also becomes more valuable. With a timeshare, ownership is not distributed. The owner purchases only weeks or months of enjoyment in a property, and these weeks or months do not rise and fall in value with the value of the property. The title is still owned by the principal owner.
Benefits of Fractional Ownership
Fractional ownership allows an individual to take part of a valuable asset without putting up the cash to purchase the whole asset outright. This is very similar to owning stock in a corporation.
In fact, fractional ownership can apply to assets other than real estate. In the case of real estate, it allows multiple buyers to grab part of a property title. If the property declines in value, the owner can sell the asset and write off the capital loss. If it increases, the owner can sell the share and receive capital gains. I’ve heard of stocks going down and companies going bankrupt. But I’ve never heard of property decreasing in value in the Riviera Maya. If the purchase was well advised and educated, you’re good to go (unfortunately selling cheap in a hurry because you need to pay off your gambling debt does not count as a decrease in value!) Fractional ownership means you are purchasing part of an asset that appreciates over time, timeshare value decreases over time.
When you simply own a few weeks at the property, you are not connected to the property title in any way. Financially, it is more beneficial to own a share of the property than simply to own a week at the property.
If you owned a $100,000 USD condo in Playa del Carmen in 2002 on the beach, (yes, such a thing was once possible) Then today, 15 years later, it’s probably worth around 500k or more.
If you had 2 weeks to use in Playa del Carmen in 2002, then you still have 2 lovely weeks a year to enjoy. But there’s no financial benefit. Call me greedy but I very much enjoy the feeling of knowing that my property is making money when I’m not using it, which brings us to my next point.
Can I still get a return on my investment through vacation rentals?
So let’s say you buy a fraction of a property and you decide to get the months of December/ January / February. There are very different properties in very different areas with very different price points. So again, just to simplify the example I’ll use 100k USD.
You have 90 days to do with it whatever you want (you can’t do that with a Time share).
That year you are going somewhere else for vacation. You won’t be using the property, so you decide you want to rent it.
-The average price per night during the Riviera Maya high season is around 250 USD per night for a condo. That’s an 18,450 USD income. (remember, this is high season, occupancy varies depending on many other factors).
-HOA fees: 300 USD per month (again, this is an approximation) = 900 USD for 3 months.
-Maid/ Laundry service: 300USD per month = 900 USD for three months.
That’s 16,650 USD after basic expenses. If you want this place running smoothly and without it taking all of your time you will need property management. Subtract the 30% you’ll have to pay to a professional and reliable property manager and you’ll have :
$11, 655 USD profit in 3 months. That’s an 11.6 % Return on your investment, without even taking into account the appreciation (around 12 %).
So a buyer with a 100k budget went from having their enquirers ignored to making a smart investment. You don’t have to be a big fish to own something substantial. You could end up getting a significant ROI, property appreciation over time and a place to visit in paradise.