Fractional Ownership: Hot New Investment or Scam of the Century?

From on May 27, 2008 in General

It used to be that timeshare ownership was the smart new investment, but after time played out, it tended to prove more effort than profit. A whole new concept is emerging in the investment venues and is worth taking a closer look at.

Fractional Ownership in commercial or residential property differs from timeshare ownership in that you actually share ownership in the title instead of just owning the right to occasional use of the property. Normally marketed through realtors, you purchase the condo or hotel room just as you would with a single family dwelling, only that you share ownership with several other people.

To better illustrate, I recently toured a brand-new hotel that was for sale in this manner. For a $210,000 investment, I could receive ownership of a luxurious, fully furnished hotel room located in a seven-story hotel building. The hotel management would control all rental activity, renting the room out on a nightly basis, just as a normal hotel would. I would have personal access to my room for up to one month per year of consecutive use with prior approval from the management. This time period could only happen during the winter season, allowing the hotel full access to the room during the summer season. For their property management services, they would keep 50% of the nightly rent, and I would receive the rest (whatever the going rate was). This particular hotel was renting for $250 per night in the peak season.

At first glance, the elegantly furnished room seemed quite appealing. It came complete with a plasma television, Jacuzzi tub, small kitchen, and even a bottle of wine, offering patrons the best possible stay. The rest of the hotel included a fitness room, restaurant, and pool along with beautifully maintained grounds. The best part was I could potentially earn over $3,500 per month in rent with none of the work and headaches associated with property management. Not only would this more than cover my mortgage payment of $1,000, but I would be enjoying a hefty income along with a beautiful place to stay whenever I pleased.

For me personally, something just didn’t feel right about the situation. There is no denying it can be a lucrative investment initially, but as my realtor pointed out, time hasn’t shown how these scenarios are going to play out. What happens after the investment company sells all of the units and no longer has a vested interest in the property? Sure, they’ll continue to manage it and take their fee, but do they care enough to keep it updated and luxurious? Unlike complete ownership, you have no freedom to do any renovations to the room. If any work is completed, it has to be done to the hotel as a whole and only what they approve. Additionally, what is your resale value going to be? You are purchasing the room at its prime, ten years from now it will be well-used. There is a good chance that instead of building equity as you would in another home, it may have depreciated below your investment.

So, is it worth it? Time will tell. You can reap the lucrative benefits as long as the going is good, hope that the property will increase in value, and you will have a strong resale market when you decide to sell. Or, as I decided to do, you can look for full-ownership in a single-family dwelling that doesn’t entail so many restrictions and will build equity over time.