Several companies such as Pacaso, Ember, and Kocomo are now offering fractional ownership of luxury vacation homes. What does this mean for second-home buyers? It means that you can own a piece of luxury real estate without breaking the bank. Fractional ownership allows buyers to co-own a property and split the costs among several people. This makes it possible for those with a lower budget to purchase an expensive vacation rental.
We’ll see that the model has expanded to Europe, with Pacaso present in Spain in the UK and with local European companies such as August, Prello, Altacasa, and Odomo Club. We’ll also touch upon Here.co, a company with a slightly different model, which proposes investing in vacation rentals like stocks and to “earn passive income from the highest-yielding asset class in real estate” (i.e. vacation rentals).
The main distinction between a timeshare and fractional ownership is that, with a timeshare, you buy the right to use a property, but with fractional ownership, you are buying a piece of real estate.
Why is fractional ownership of luxury vacation homes hot?
Over the last two years, vacation rentals have become a sought-after type of asset:
- Real estate prices, in general, have increased and so have vacation rental home prices
- The COVID-19 pandemic has led many to (re)discover the charm of vacation rentals by the sea, in the mountains, or in the country.
- The huge demand for vacation rentals from guests has led to high rates (ADRs), making the return on investing in a vacation rental more attractive.
- Vacation rental supply has actually been short in some highly demanded markets, leading to the construction of more them
Yet, buying a vacation rental home can be expensive, while yearly operations costs can also become a burden after a while. So, until now, a large section of potential investors have been drive away from the market. Timeshare was a possible solution but we’ll see that fractional ownership positions itself as something different.
Fractional ownership allows buyers to co-own a property, and split the costs among several people. This makes it possible for those with a lower budget to purchase an expensive vacation rental.
The rise of rational ownership has led to rising press coverage:
- Pacaso raises $75M, goes from launch to unicorn in 5 months
- Here, a Vacation Rental Investment Marketplace, Publicly Launches With $2 Million Pre-Seed Funding
- ALTACASA RAISES €2M FOR LUXURY SECOND-HOME OWNERSHIP PLATFORM
- KOCOMO RAISES $56M FOR LUXURY HOME CO-OWNERSHIP MODEL
- Luxury Second Home Co-Ownership Platform Pacaso Makes UK Debut
Yet, not all press articles are positive, as local neighborhoods fear that these companies are bringing guests that can be noisy and not respectful of local regulations.
- Park City considering fractional ownership rules amid Pacaso’s rise
- Santa Barbara Neighborhood Rises Up Against ‘Fractional Ownership’ Property – Residents Speak Out Against Pacaso’s ‘Suspiciously Timeshare-Like’ Business Model
Real estate is supposed to be one of the least liquid assets. Most often, second homes often take longer to sell than primary homes. One of the goals of fractional ownership is to turn vacation rentals into a more liquid class of assets. By turning houses into shares, these companies make it easier for more people to buy and sell “ownership” of these properties, thus making the market more liquid.
More than one business model behind fractional ownership of vacation rentals
Pacaso, the most famous player in the fractional game
To better understand what these companies offer, let’s have a look at how Pacaso presents itself.
Their promise:
Start enriching your life today, not “someday.” We’re here to help you experience the joy of second home ownership. With Pacaso, you own a spectacular second home for 1/8 of the cost, while avoiding the hassles of traditional ownership.
Pacaso modernizes the decades-old practice of co-ownership by creating a marketplace that makes buying, owning, and selling a luxury second home easy.
From curating the best listings in top second home markets to offering integrated financing and sales from as little as ⅛ to as much as ½ ownership; upscale interior design; and professional property management, Pacaso provides owners with all the benefits of owning a second home with less hassle.
After purchase, Pacaso manages the home on an ongoing basis and supports a frictionless resale process in partnership with a licensed real estate professional.
Note that it is not possible for Pacaso owners to list their place on Airbnb or other vacation rental listing platforms.
Altacasa, a French-based Pacaso-like company
Altacasa does a great job summarizing its value proposition, which is close to that of Pacaso. Here’s how Altacasa says that its company works:
Dream: Choose the house of your dreams and imagine your ideal vacation, fly solo, with family or friends
Buy: Invest, depending on the time you wish to spend there. We help you define your ideal number of shares (from 1 to 4 shares out of 8), we find the other co-owners and build the legal structure
Book: Book your stays easily , through our app (1/8 share = 44 days). Our algorithm guarantees a flexible, fair and transparent reservation between the co-owners.
Enjoy: Make the most of your second home without any stress at all. We take care of everything: legal structure, works, co-owners, decoration, administrative and financial follow-up, maintenance, cleaning, repairs.
August: Fractional ownership as a safer way to purchase vacation rentals internationally
August is a UK-based company that positions itself as “the most convenient way to buy and own holiday homes abroad.”
Here’s what the company says:
“Our professionally managed co-ownership model enables you to be part of either a single home with 7 other families or be part of a collection with 20 other families and co-own 5 holiday homes.”
- What is an August co-ownership?
- As a co-owner of an August collection, you own a share equal to 1/21 of the five properties purchased by the collection. All shares of a collection are equal and all co-owners enjoy the same rights.
- How is it different from a timeshare?
- August is not and fundamentally different to a timeshare. With August, you become a co-owner of five homes. In a timeshare, you typically purchase the right to use one dwelling for a specific period. You can only exchange your weeks if the person owning the weeks you are interested in is willing to exchange their weeks with you. Read more here.
- It is extremely hard to sell a timeshare as you need to find someone interested in both the same location and the exact same weeks that you have purchased, by yourself. With August, you own a share of not one but five properties, and it is not tied to any particular weeks. Most importantly, in a typical timeshare, once all the shares have been sold the property developer has no incentive to find new potential buyers and you are left alone to find a potential buyer for your share. On the contrary, August is constantly looking for new potential buyers to enter new funds. Buying a share in an existing fund has a premium, as new buyers can see the properties in the collection before buying and start using them as soon as they buy their share.
Here.co, where vacation rental ownership turns into shares in a marketplace
You do not directly own the house but shares in Here.co. The owner also receives money from the booking revenues generated by their vacation rental (pro rata of their ownership stake). A Here investor owns an interest in a series of the Here LLC and is eligible to receive quarterly distributions of pro-rata free cash flow (rents minus fees, expenses, and additional reserve allocations) generated by the property, plus potential appreciation and tax benefits normally associated with direct property ownership, such as depreciation and expense write-offs.
Here’s what Here.co says:
Invest in vacation rentals like stocks.
Earn passive income from the highest-yielding asset class in real estate with vacation rentals.
Title for the homes is held in a series LLC by Here and is administered by Here on behalf of our investors.
Investors select a Here property and acquire fractional interests that represent an indirect ownership interest in that property. The investment is designed to deliver passive income without management responsibilities.
Once Here accepts your investment and your funds are transferred, you will be entitled to receive distributions of pro-rata net rental income (rents minus fees, expenses, and additional reserve allocations) generated by the property, plus potential tax benefits normally associated with direct property ownership, such as appreciation, depreciation and expense write-offs. Here handles operational responsibilities.
Here plans to offer investors liquidity through a secondary market in the future. If a secondary market were to open, investors would have the chance to sell their shares, subject to liquidity and compliance with the transfer restrictions described in our Operating Agreement or Offering Circular. Investors may indicate their desire to exit an interest, including their desired exit price, by contacting Here support. Transfer fees may apply and would be disclosed before finalizing any potential exit request.
Who manages the property?
Here partners with top-rated local third-party property managers to handle the day-to-day management activities including cleaning scheduling, maintenance, demand optimization, and guest relations.
Other competitors to note:
Why some local neighborhoods oppose fractional ownership of vacation rentals
Recently, local bodies have started looking at creating new regulations for fractional ownership, as the properies do not seem to fall under either short-term rental or timeshare regulations and taxes.
For instance, here’s part of an opinion piece titled “Pacaso is a lose-lose situation”:
Everybody loves a win-win. But occasionally we’re met with a lose-lose. When a Pacaso home moves into our community, nobody wins (other than Pacaso). Pacaso is the new well-funded real estate company that’s buying up single-family homes in residential neighborhoods across wine country. After they buy the house they flip it into a “fractional ownership” which is just another way of saying timeshare. They sell 1/8 ownerships in the home. Your “ownership” in the home is defined by the amount of time you’re allowed: a 1/8 share gets you 44 days, but no more than two weeks at a time. You’re able to gift your share to friends and family, like a timeshare. If this sounds like a recipe for disaster, you’re right. Who can keep track of the number of people coming in and out, having parties, and generally little regard for our community because, hey, they’re on vacation. Plus, they don’t pay the transient occupancy tax (TOT tax) like Airbnbs and other vacations rentals.
How Fractional Ownership Works
With fractional ownership, buyers own real estate—usually through an LLC. And, like with any property purchase, each owner is responsible for a share of the mortgage, taxes, and upkeep.
But here’s where things get interesting: Fractional ownership can be structured in a few different ways, and each company has their own model.
With some companies, you purchase a share of the property and then book your stay through the company’s website (think Airbnb). With others, you actually own a deed to the property and can use it whenever you want—no need to go through a third-party website.
There are benefits and drawbacks to both models (which we’ll get into later), but the important thing to remember is that with fractional ownership, you have true property ownership. And that’s something that has traditionally been out of reach for most second-home buyers.
The benefits of fractional ownership
When it comes to fractional ownership of luxury vacation homes, there are several benefits that come with the territory. Perhaps one of the biggest benefits is the affordability factor. Fractional ownership allows buyers who may not have the budget for a second home outright to purchase one anyway. This is because buyers co-own the property and therefore split the cost with other homeowners.
Another big benefit of fractional ownership is the amount of time you actually get to spend at the property. With traditional second home ownership, buyers often only get to visit their property a few times per year – if they’re lucky. Fractional ownership, on the other hand, allows for more frequent visits since the cost is spread out among several owners. This means that you can enjoy your luxury vacation home more often without breaking the bank.
If you’re considering purchasing a second home, fractional ownership is definitely worth looking into. It’s a great way to get all of the benefits of owning a luxury vacation property without having to pay for it all yourself. Do some research and see if fractional ownership is right for you.
When looking to purchase a fractional ownership in a luxury vacation home, it is important to do your research and find the right company for you. Here are some tips on how to choose the right company:
1. Look for a company that offers a variety of properties worldwide.
2. Make sure the company has a vested interest in the success of your property.
Look for a company that offers a variety of properties worldwide:
When looking to purchase a fractional ownership, you want to find a company that has a wide selection of properties. This gives you the ability to find the perfect property for your needs. Ember has a network of over 100 luxury vacation homes in 27 different destinations worldwide.
Make sure the company has a vested interest in the success of your property:
You want to make sure that the company you are working with has a vested interest in the success of your property. At Pacaso, we work with our homeowners to ensure their home is being rented at a fair price and that they are getting the most out of their investment. We also offer a full-service management solution so our homeowners can relax and enjoy their second home worry-free.
Choosing the right company to purchase your fractional ownership from is important, but with so many great options available, you can’t go wrong. Fractional ownership is the modern way to own a second home and with Pacaso, Ember, Here, Kokomo, Prello, or Altacasa, you’re sure to find the perfect property for your needs.
Things to consider before buying a fractional vacation home
When considering purchasing a fractional vacation home, there are a few things you should take into account.
First, is the property in a desirable location? Fractional ownership often offers access to properties in prime locations that may be out of reach for the average vacationer. However, it’s important to make sure that the property is somewhere you would actually want to visit. There’s no point in paying for a fractional ownership share of a property if you’re never going to use it.
Second, what is the quality of the property? Fractional vacation homes are often luxurious, but it’s important to make sure that the quality of the property lives up to your standards. You’ll be paying a fraction of the cost, so you don’t want to end up with a property that is anything less than perfect.
Third, what are the terms of the fractional ownership agreement? Make sure you understand exactly how much time you will have access to the property each year and what restrictions there are on use. Some agreements may limit the number of people who can stay at the property or the times of year when you can visit. Others may require that you give the property owner advance notice before using it.
By taking these factors into account, you can be sure that you’re getting the most out of your fractional ownership agreement and that you’ll be happy with your vacation home.
