What is Fractional Ownership in Real Estate? How Does It Work?

What is Fractional Ownership in Real Estate? How Does It Work?

When buying a house, it may take several years to arrange the amount needed to get one. However, there are other methods like fractional ownership that can help you buy a property. Fractional ownership, mainly for Non-Resident Indians (NRIs), has been gaining popularity as an investment option in India. The primary reason for the growing popularity of fractional real estate is the dual benefit it offers in terms of rental income and capital appreciation.

Fractional ownership is the medium of real estate buying where a group of like-minded people pool their resources to buy a commercial property hence becoming fractional owners. This kind of asset acquisition simply distributes the high cost into several fractions, allowing buyers to explore real-estate opportunities for a fraction of the cost previously required.

Here is what you need to know about fractional ownership.

What is the Meaning of Fractional Ownership in Real Estate?

Fractional ownership is an investment medium in which a group of investors combine their funds to buy a property. In this method, all the investors get a share of the high-value asset (according to their investment ratio) in a passive capacity. This distributes the financial burden of owning property while allowing investors to profit from the investment. Fractional ownership plays a role as an investment strategy for high-value assets like vacation homes, sports automobiles, and private aircrafts. Typically, a property management firm organises fractional real estate investment.

The fractional ownership method can be used to buy a commercial building, a residential home, a plane, a yacht, or even a warehouse. Based on the asset price, all investors share the associated income and expenses in the ratio of their investment. Assets leased by corporations, such as vehicles, equipment and furnishings, have recently followed the trend of fractional ownership.

Why Is It the Next Big Thing?

If one wants to own a private aircraft, boat, vacation home, or even a house in a metropolitan city, fractional ownership makes the purchase practical and convenient. Fractional ownership in real estate is growing exponentially because this method allows people to own an asset with lower risk and without investing the full amount.

Furthermore, the entire fractional property investment is distributed to net distributable cash flows. Unlike other investments, the fractional ownership corporation does not impose fees on your investment. However, you might have to pay a small, fair fee for the maintenance of the asset.

Model of Fractional Ownership

Some fractional ownership or fractional real estate arrangements are as given below. However, with fractional ownership, there may be no guarantee of income certainty:

  • Joint asset ownership

    The fractional property gives full selling rights to all individual owners without jeopardizing the rights of other investors. If a co-owner wants to sell their stake, they do not require permission from the other co-owners.

  • Cooperative model

    Interested investors band together to form a cooperative society that buys assets in the society’s name. If a fractional owner decides to sell their share, their portion is transferred to another fractional investor.

  • Company structure

    In this method, investors from a company can purchase assets in the name of that company. The company must follow the regulations and provisions of the applicable Company Act. The fractional investors become the company shareholders.

  • Trust structure

    All interested investors form one trust with the property seller as the author of the trust deed. For the benefit of all fractional owners, a seller performs the sales deed as per precise instructions and directives.

Conclusion

As of today, fractional ownership real estate is a relatively new concept in India that is pending tax legislation by the government. However, it is not only residential properties that come under fractional ownership; commercial properties can also be purchased through a Specific Purpose Vehicle (SPV), where the investor owns the property shares from the SPV.

Fractional ownership real estate in India is a relatively new concept that is quickly gaining favour. Tax legislation in this space has yet to be developed by the government. However, as investors, fractional real estate investments can be beneficial if you make informed decisions after careful assessment of other stakeholders, property, and other factors. Buying a home is a lifetime decision; ensure you make the right one.

Disclaimer: This article is based on the information publicly available for general use. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice to buy or sale property on fractional ownership instead, it is for general informational purposes only. We expressly disclaim any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.

We use cookies to help you get the best possible experience of our site. By clicking ‘Accept’ you agree to our use of cookies.