Investor (Fractional Ownership) vs. 100% Ownership
Below is a comparative table outlining the advantages and disadvantages of being a Fractional Owner versus a 100% owner of a property. Let’s compare apples to apples by using an example where an investor invests $195,000 i(that is a minimum amount needed for a second home purchase - 25% down plus some for repairs) n a property valued at $650,000.
As can be seen, a Fractional Owner can purchase 30 shares and, therefore, own 30% of the company. Consequently, in the first year, they will receive an initial revenue share of $7,294.82, or $1,823.70 quarterly.
However, if the investor were to purchase the home on their own, they would require 25% down, which they have. They would then need to raise a mortgage of $470,000 at a current interest rate of 7.9%. This would result in an additional $43,450 in annual interest expense, compared to the $0 mortgage interest annual expense associated with fractional ownership. Additionally, 100% ownership would require a Mortgage Insurance Expense of $8,184 annually, which is not the case with fractional ownership.
Other annual expenses, regardless of ownership status, include LLC annual fees, property taxes, property insurance, home warranty, repair fund, and property management. The only additional fee for fractional ownership is a small fee of $990 per year for investor portal and accounting expenses.
Once the home rents for $3,500 per month, the Fractional Investor begins to receive quarterly returns of $1,823.70 or $7,294.82, resulting in a return on investment (ROI) or yield of 3.7%. Conversely, the 100% owner will be upside down and will need to pay $2,223.41 per month to cover expenses, or $26,681 annually. This creates a negative ROI of 13.68% on the investment.
Let us assume that both investors sell the investment after 10 years and realize the typical growth in property values in Southern California, which is either 100% or double the original price. Consequently, they sell the property for $1,300,000.00. After the $650,000 is repaid for the initial investment, including the 100% ownership, it becomes evident that the investor has made a substantial profit of $195,000 on their initial investment of $195,000. This represents a 100% gain profit or an average annual return of 8%. The 100% owner, on the other hand, earns $329,828.00, which is a substantial profit. However, when comparing combined annual revenue and payouts to the investor, the average return for the investor is 12%, while the 100% owner’s combined average return over the 10-year investment is only 0.32%. Therefore, the 100a% owned investment does not appear to be a wise choice with such high interest rates and mortgage insurance..
